A Quick Beginner’s Introduction to Monero

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An image of the Monero project logo

What is Monero (XMR)

Last Updated: 30th October 2018

Launched in April 2014, Monero is an open-source digital currency that was forked from the CryptoNote protocol, and much like Bitcoin, monero can be used to purchase various goods and services over the internet. Monero as a currency distinguishes itself by granting its users an increased level of transactional privacy when compared to its digital counterparts.

The protocol achieves a greater level of transactional privacy through the implementation of cryptographic technologies such as: Ring Confidential Transactions (RingCT) and stealth addresses and ring signatures. The net result of Monero’s focus on privacy is a currency that obfuscates transaction information such as the sender, the recipient and the transaction amount itself. Therefore, monero as a currency can be considered to be completely fungible, i.e. one monero is equal to another one.

Similar to cryptocurrencies such as Ethereum and Bitcoin, Monero utilizes a proof-of-work (PoW) consensus mechanism wherein miners most solve a cryptographic puzzle in order to add a block of transactions to the Monero blockchain. The current block reward for doing so is 4.39 XMR, however, rewards will decrease until the end of May 2022, after which, a fixed block reward of 0.6 XMR will be implemented.

Unlike with other digital currencies that have a fixed block size, e.g. the Bitcoin protocol has a fixed block size of 1 MB, the Monero protocol utilizes a dynamic block size that changes based on the previous 100 blocks. Periods of high transaction volume results in the block size increasing, conversely, periods of low transaction volume results in the block size decreasing.

Privacy: Stealth Addresses, Ring Signatures & Ring Confidential Transactions

Stealth Addresses 

Stealth addresses are a method by which additional security can be granted to the recipient of a digital currency by requiring the sender to create a random one-time address for a given transaction. When multiple transactions sending funds to a stealth address are conducted, instead of these transactions appearing on the blockchain as multiple payments to the same address, what will be recorded will in fact be multiple outgoing payments to different addresses. This makes it impossible to link transactions to the recipient’s published address or one-time generated addresses. The owner of the stealth address can then use their private view key in order to see all their incoming transactions.

For example, if a website wanted to receive donations in a digital currency but didn’t want these donations to be publicly viewable on the blockchain, they could publish a stealth address instead of a public address. By doing this, each new donation would require a one-time address to be generated, making it impossible for the future transaction activity of the website to be tracked.

Ring Signatures

Monero utilizes ring signature technology to protect a user’s privacy in the input side of a transaction. A ring signature is a type of digital signature in which a group of possible signers are merged together to produce a distinctive signature that can authorize a transaction.

A ring signature is composed of the actual signer, who is then combined with non-signers to form a ring. The actual signer and non-signers in this ring are all considered to be equal and valid. The actual signer is a one-time spend key that corresponds with an output being sent from the sender’s wallet. The non-signers are past transaction outputs that are drawn from the Monero blockchain. These past transaction outputs function as decoys in the ring signature transaction by forming part of the inputs of a transaction. From the perspective of an outside party, all of the inputs appear equally likely to be the output being spent in a transaction. Monero utilizes ring signature technology to help the sender mask the origin of a transaction by ensuring that all inputs are indistinguishable from each other.

For example, if Bob wishes to send monero to Alice, with a ring size value of five, one of the five inputs will be pulled from Bob’s wallet, which will then be added to the ring signature transaction. The other four inputs are past transaction outputs that are pulled from the Monero blockchain. These four inputs are decoys, and when fused with the input from Bob’s wallet, forms a group of five possible signers. A third party would not be able to determine which input was actually signed by Bob’s one time spend key. However, with the use of a key image, the Monero network is able to verify that the amount being transferred to Alice has not been spent before.

RingCT

Ring confidential transactions work in a different manner. To illustrate, consider:

Bob possesses 10 monero, and would liked to send 5 monero to Alice. Because an output on the Monero blockchain cannot be spent twice, Bob is required to spend the output in its entirety, and return the change to himself. Thus, Bob’s transaction would be the following: one input of 10 monero, and 2 outputs. One output that is 5 monero designated for Alice, and the other 5 monero that is sent back to Bob as change.

The objective of the ring confidential transaction privacy feature is to allow only the participants of the transaction to see the amount of that is being transferred, and otherwise obfuscate this amount from outside parties. However, at the same time, it is also necessary that the network is able to confirm the validity of this transaction that has been initiated. In order to prove that the transaction between Bob and Alice is not fraudulent, the sum of the transaction’s input must equal the sum of its output. In this case, in the transaction between Bob and Alice, the input of 10 monero, must also equal the output of 10 monero.

Fungibility 

As previously mentioned, because of Monero’s focus on privacy, it can be considered as a truly fungible currency. Fungibility simply means the ability for one unit of a good or currency to be interchangeable for another unit with out loss of value. For example, the US dollar is fungible because 1 dollar can be exchanged for another one without loss of value. Conversely, because bitcoins can be tracked through an open and accessible blockchain, if those bitcoins were ever used for, or gained by, illicit activity, then they may be labelled as “tainted”. Merchants may refuse to accept these tainted bitcoins, and thus, they may become less valuable when compared to other bitcoins. Exchange without loss of value is no longer possible, i.e. these bitcoins are said to be non-fungible.

Due to the implementation of the cryptographic privacy technology described above, tracking a Monero coin on its blockchain is essentially impossible. This inability of being able to track XMR means the issue of the digital currency ever being “tainted” does not arise.

Additional Resources

More information can be found on the Monero website.

Bitinfocharts can be used to track the changes in the block size depending on the transaction volume of the past 100 blocks. The Monero subreddit can be used to follow all the lastest developments relating to the Monero project.