Monero: What It Means, How It Works, and Features

What Is Monero?

Monero is a digital currency that offers a high level of anonymity for users and their transactions. Like Bitcoin, Monero is a decentralized peer-to-peer cryptocurrency, but unlike Bitcoin, Monero is characterized as a more anonymous or privacy-oriented virtual currency.

History of Monero

Monero was created as a grassroots movement with no pre-mine and no VC Funding, and launched in April 2014 as a fork of Bytecoin. A fork occurs when an original cryptocurrency is split into two to create another version, which is made possible due to the open source formats prevalent in most cryptocurrency designs. Most forks are formed to address flaws of the parent currency and to create better alternatives.

Monero's creator used the name "thankful_for_today" in the Bitcoin Forum post where it was announced. After some division between developers, thankful_for_today and Monero development participants split ways, with a forked version remaining the one that is now popular.

Monero uses a proof-of-work algorithm adjusted to be processor-friendly and resistant to the application-specific integrated circuits (ASICs) that have taken over other cryptocurrency networks.

Monero vs. Bitcoin

The Bitcoin blockchain records all transactions and addresses, making them publicly viewable. Monero uses a feature called ring signatures, which obscure the sources of funds so that they are virtually untraceable to the parties involved in the transfer. The ring signature ensures that every Monero transaction between two parties is grouped with multiple transactions that occur among other unrelated parties.

This means that the recipient’s funds are mixed in with other Monero users’ transactions, and moved randomly across the list of transactions, making it exponentially difficult to be traced back to the source or recipient. The ring signature also decrypts the actual amount involved in any transaction. Note that the ring signature is different from the mixing and coinjoin anonymization technique adopted by other cryptocurrencies vying for anonymity.

The Monero ledger, unlike some other privacy blockchain projects​, doesn’t record the actual stealth addresses of the sender and recipient, and the one-time created address that is recorded is not linked to the actual address of either party. Therefore, anyone examining Monero’s opaque ledger wouldn’t be able to track down the addresses and individuals involved in any past or present transaction.

Transactions

Bitcoin records ownership of unspent transaction outputs, while Monero has a very distinct way of handling transactions. It splits the transferred cryptocurrency into multiple amounts, treating each split amount as a separate transaction. For example, a user who transfers 200 XMR (Monero’s currency unit) to a buyer could have the amount split into 83 XMR, 69 XMR, and 48 XMR.

Each is treated as a separate transaction, and a unique one-time address is created for each of the split figures. With the ring signature, each of these split amounts is mixed in with other transactions, which, of course, have also been split, making it extremely difficult to identify the exact mix of 200 XMR that belongs to the recipient.

Transacting with Monero does not give the sender a window view of the recipient’s holdings, even though the sender knows the recipient’s public address. Monero transactions are unlinkable and untraceable. Coins sent to a recipient are rerouted through an address that is randomly created to be used specifically for that transaction.

Other Monero Features

Monero's popularity in the crypto world rose primarily due to its anonymization characteristic, which allows for transparency based on the users' discretion. All users have a "view key" that can be used to access an account with the corresponding private key. A user can give their view key to selected parties with limitations in place such as:

• To only view the account holdings
• Access to all historical and current transactions
• Access to only specific transactions in the account.

Selected parties can include parents who may need the view keys to monitor their kids' transactions or auditors who the user would like to give access to audit their account holdings and worth.

In addition to the view key, users also have a "spend key" that authorizes a selected entity with which the user shares the key to spend or transfer funds from the account. Like the view key, the spend key is 64 characters long and consists of alphabets and numbers.

The popularity of Monero has grown, not just for the intent of engaging in illegal activities in the underground market, but also for individuals who simply want to be able to acquire goods and services online anonymously or discretely without leaving a digital "paper trail."

The Bottom Line

Monero is a privacy crypto designed to confuse anyone investigating transactions. Its techniques break transactions into smaller amounts and mix them up, making them nearly impossible to trace. For this reason, it is illegal to use in some countries, while others allow it but monitor transactions carefully.

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