What is Monero (XMR) Privacy Coin?

Monero (XMR) is a cryptocurrency that is classified as a privacy coin. Privacy coins hide wallet addresses and payment amounts between parties. Similarly to other cryptocurrencies, Monero is built using blockchain technology.

Monero is a grassroot initiative. There is no company or central authority directing the development of Monero. Instead there are many community members that contribute to the project.

The community members are motivated to interact with each other. This is because they believe in the right of having privacy transactions. In fact they volunteer to help write open source code for Monero.

Annotated Monero Whitepaper

This is the original 20 page pdf Monero whitepaper written by Nicolas van Saberhagen. (Nicolas van Saberhagen is likely a pseudonym.)

It is annotated with notes made by the Monero Research Lab. The notes explain some of the more technical concepts more simply. Additionally they review some of the claims that were made in the original paper.

Download Whitepaper

How Monero Works: Blockchain

Like any other cryptocurrency, Monero uses blockchain to facilitate transactions and keep track of them. The network is completely decentralised. This means anyone can take part in the network. So long as you have an internet connection and a device to connect to the blockchain.

The blockchain makes sure the network operates without any fraud in the system. As a result this gives confidence to the users of the network.

Monero is private unlike Bitcoin that has a public blockchain. You can see all the transactions and amount of BTC in each wallet on the internet.

However even though Monero is a private blockchain there are still ways and means to audit the network. Anyone can join the network and make sure the blockchain is honest.

As transactions are made the blockchain checks that they are legitimate transactions. If there is double spending (the same coins are spent twice) the transaction is rejected. If the transactions is fine then it is approved and it gets added to a block.

Blocks are attached to the blockchain. Each block gets added one after the other forming a chain.

How Monero Works: Consensus

Monero operates with a proof-of-work consensus mechanism. Consensus is when everyone on the network is in agreement that the transactions are legitimate. Hence the network is honest.

Miners fill an important role with reaching consensus because they are the ones that approve transactions. As a result they collect rewards from the blockchain which compensates them for the work they do on the network.

So miners secure the network and it gives confidence to users of the blockchain.

How Monero Works: Privacy

The Monero community have implemented a number of features that tackle privacy from different angles.

At some point Monero was the best privacy coin. However third parties have managed to get around Monero’s privacy. (I will cover this further down this article.) Additionally other privacy coins have come onto the scene. So there is some competition on the top spot for which cryptocurrency is the most private.  

You can still remain private when you use Monero. However you will need to take extra steps to ensure your privacy.

Unfortunately if privacy is not by default this is not the best solution. In fact if you are looking for truly private coins you should have a look at the best privacy coins.

The features that Monero uses to have privacy on its network are:

Ring Signatures

When you go to make a payment the Monero blockchain executes the transaction. At the same time the blockchain pulls amounts from previously executed transactions. The funds form a ring and hence the name ring signatures.

By doing this, outside parties cannot tell who or where the true funds originated from. Additionally the blockchain bonds the real and decoy senders to form a unique signature. The signature authorises the transaction.

This feature is designed to protect the identity of the sender.

Ring Confidential Transactions

Ring confidential transactions or Ring CT for short. This feature hides transaction amounts in the blockchain for all transactions.

Stealth Addresses

Stealth addresses is a one-time use wallet address. The Monero blockchain creates a new address for each and every transaction. This is why stealth addresses are also known as one-time public keys.

When the blockchain uses this method, the identity of the recipient is hidden and kept safe. No one will ever know you wallet address because this is never disclosed on the blockchain.

Dandelion ++

Dandelion is a mechanism that allows transactions to take place quietly on the blockchain. It’s only after a transaction has gone through several nodes on the network that the whole network gets notified.

The purpose of using this method is because it is far easier to pin point the source wallets when transactions are reported instantly. By delaying the notification of the transaction third parties have a much harder time distinguishing the source addresses.

Monero vs Bitcoin

Monero and Bitcoin are similar, but they are quite different from each other. Some things are fairly straight forward as outlined in the table above. However there are some differences that need more of an explanation.

Block Size

Firstly unlike Bitcoin and some other blockchains, Monero blocks are not all the same size.

There is no maximum block size. To clarify that means the network can handle more transactions per second if demand increases.

As a result Monero is more scalable than Bitcoin’s base layer. It is flexible and can adapt to meet the needs of the network. So you get faster transaction times and lower transaction costs.

ASIC-Resistant

One other major difference of Monero vs Bitcoin is that Monero is ASIC-resistant. ASIC miners are powerful computers that are highly efficient.

ASICs are able to mine blockchains at a much faster rate than regular computers with basic CPUs. The Monero team decided to make Monero ASIC-resistant so as the network remains more decentralised.

Monero is ASIC-resistant because of the RandomX algorithm. So no one can build Monero specific mining equipment and there is a level playing field. Anyone can get consumer-grade hardware and take part in the network.

Meanwhile blockchains that are not ASIC-resistant (like Bitcoin’s) get more consolidated. Firstly there are not many companies producing ASICs. Additionally the number of people that are able to mine the blockchain decrease. This is because of the costs involved with ASIC mining.

Maximum Supply

Bitcoin’s maximum supply is 21 million BTC. After all the 21 million BTC has been mined from the network there will be no more block rewards. So miners can charge transaction fees instead to get compensated for their work.

On the other hand Monero does not have a maximum supply limit. Once Monero miners mine 18.4 million XMR the block rewards will go down to 0.6 XMR. This is known as ‘tail emission’ and it is designed to continue to incentivise the miners to maintain the blockchain.

Security Against Fraud

Since Monero has all these privacy features it has to have a way to be audited. Otherwise if there are any fraud issues flagged it could cause a loss of confidence in the coin. As a result it would instantly tarnish its reputation as a hard money. Most users would end up likely selling their crypto.

For this reason the network uses key images. One key image is produced for every transaction that happens on the network. They contain enough information for miners to verify that no fraud is happening on the network. Most especially they check that no coins are double spent and the network is not hacked.

Key images are produced in such a way so as to provide only the basic information. That is to enable auditing and integrity of the network and at the same time safeguarding privacy.

How Monero Can Be Traced

In August 2021 a company called CipherTrace announced they are able to analyse Monero’s blockchain.  

Sourced from the CipherTrace Website

CipherTrace are one of the best cryptocurrency compliance companies. Their research got partially funded by the US Department of Homeland Security Science and Technology Directorate.

Even though the Monero team had what rock solid security it is not that secure any more.

Most people are not going to know what is going happening on Monero’s blockchain. So it is still more private than Bitcoin. No one can see your wallet address online and how much XMR you own.

However governments and companies can find out this information.

How to Use Monero

If you already have a good idea how to use crypto based wallets then using the Monero wallet is similar. However if you are new to cryptocurrency you have some learning to do.

You could buy Monero from an exchange and keep it there, but many exchanges have been hacked. So the best thing to do is hold Monero yourself so you don’t have any third parties involved. Holding your own crypto funds yourself is the amazing thing about crypto.

The Monero team have their own GUI wallet which you can use.

Monero Wallet

As you can see, you can manage your Monero funds directly using this wallet. You can easily receive or send funds, view your account and transaction history. Additionally you can pair it up with a hardware wallet like Trezor or Ledger to give you optimum security.

To download the wallet you need to visit the official Monero website download section.

After that you should watch the video below. It shows you how to use the Monero wallet with a hardware wallet. However it also shows how the wallet works.

If you do not want to use a hardware wallet you can ‘create a new wallet’. However you need to make sure you select the save the 25 word mnemonic seed. Also you should make sure you write down the words. If you ever have problems with your wallet in the future you can get access to your wallet using these words.

Anti-Money Laundering Regulation for Monero

You can apply anti-money laundering regulation to Monero as well as other privacy coins. The Perkins Coie whitepaper has all the details on how you can do this.

The recommendations in the whitepaper are provided by the Financial Action Task Force. They acknowledged that regulated entities are able to fully comply, even if they support privacy coins.

The 40 page report mentions the benefits of having financial privacy by using privacy coins. Likewise this applies for both individuals and businesses.

It is no surprise that privacy coins should be acceptable to regulators. Holding privacy coins is very much like having a standard bank account anyway. The difference is that there is no custodian bank taking care of your funds. That is, unless you use a centralised exchange. In that case the exchange has custody of your funds.

Alternatively the best practice is to keep cryptos out of third party hands. That is to say to store them off exchanges and in hardware wallets. Like this there is less risk that you would lose your cryptocurrency to hackers.

When you use a bank no one can see the parties you transact with and the transaction amounts. Only you, the other party and the bank are aware of the information involved. Privacy coins are exactly the same.

This is in contrast to transparent blockchains like Bitcoin or Ethereum. These blockchains show wallet addresses, the amounts they contain and who they transacted with. Anyone can easily looked up this information online.

This is why privacy coins and especially reputable ones are so attractive.

Monero Project Transparency

The Monero community are highly transparent and meet on a regular basis. They keep the public updated with what is happening on the Monero website. Anyone can access their Monero meeting notes here.

Additionally they are very active on social media including Twitter, Reddit and other social media platforms.

Get funding from the Monero community

The Monero community are really plugged in and supportive of community members.

In fact if you are looking to fund project/s for Monero you can resort to the forum funding system. The forum funding system (FFS) have funded many projects in the past. Including other crypto related projects.

You can access the forum funding system here.

Frequently Asked Questions