- Monero is a blockchain that makes the movement of crypto private by disguising transaction details
- Privacy may be back on the agenda as XMR has surged 27% since the end of January
With increasing awareness of privacy protection, anonymous cryptocurrency has also stepped back into the limelight.
Anonymous cryptocurrency is not a new concept. The earliest anonymous coin was Bytecoin, which was based on the now-dormant CryptoNote protocol. However, Bytecoin was not successful because of a controversy. The Bytecoin blockchain supposedly began in 2012, during which developers pre-mined 80% of all Bytecoin supply. This was problematic because a. The CryptoNote whitepaper was only published in 2013; b. An unknown individual or group of people was controlling a vast majority of what was supposed to be a decentralized coin.
Lack of confidence caused Bytecoin to fail. Then Monero (XMR) launched as a hard fork of Bytecoin. A hard fork is a radical upgrade to a network’s protocol that can make previous transactions and blocks either valid or invalid. Today, XMR is considered one of the top anonymous coins.
So how does Monero keep transactions anonymous?
Image credit: Monero
Monero employs a ring signature technology where it mixes the digital signature of a user with the signatures of other users to obscure transaction data. The transaction is then recorded on the blockchain.
As shown in the image above, when users are arranged in a ring, the status of each user in the ring appears to be equal to one another. In this case, it is difficult to guess who the signer is. If User 5 sends XMR to User 1 and sets 6 obfuscated transactions, the network will automatically generate 6 digital signatures. In addition to the one sent from User 5 to User 1, the other 5 signatures are used to disguise the actual signer.
The default number of signatures is currently set at +10 signatures for each transaction.
Ring Confidential Transactions (RingCT)
Using the same example, when User 5 makes a transfer to User 1, the transaction will utilize RingCT, a mandatory feature to hide transaction amounts on Monero.
In Ring CT, the actual transaction amount is disguised by using random numbers and revealing just enough information for miners to confirm the transaction.
The purpose of stealth addresses is to break the association between sender and receiver addresses. Whenever the sender initiates a transfer, funds will not be sent directly to the recipient's address, but to an address temporarily generated by the system.
When User 5 transfers XMR to User 1, User 5’s wallet uses User 1’s public view key and public send key to generate a one-time public key to receive the XMR. Anyone can see this public key but only User 5 and User 1 know the transaction details.
User 1 can verify the transaction went through by using his private key to search the blockchain. This whole process occurs without having both users’ wallets publicly linked to the transaction.
Monero’s surge in popularity
Even as the wider crypto market sees a downturn, privacy-focused tokens have surged. XMR itself has gained over 27% to its value since the end of January.
Regulatory crackdown on crypto exchanges and recent global sanctions may have pushed crypto traders to utilize privacy protocols to prevent assets from being frozen or seized.
This ties in with potential risks of using Monero. While Monero may be suitable for those looking for a more private trading experience, anonymous transactions sound too good to be true and naturally lead us to wonder about the possibility of using Monero for dark-web transactions.
On one hand, while transactions can be obscured and made anonymous, surrounding contextual information could potentially be utilized to trace transaction data. Thus, it is difficult to achieve 100% privacy. On the other hand, too much privacy could lead to illicit activity that is hard to trace.
Privacy coins will always struggle with this catch-22. Regulation surrounding privacy coins will be a topic to watch in years to come.
The views expressed in this article are the author's alone and do not necessarily represent the views of ApolloX.
Risk Reminder: Crypto trading carries a risk. All trading activities are done at your discretion and at your own risk. The information here should not be regarded as financial or investment advice from ApolloX. ApolloX will not be liable for any loss that might arise from your use of any financial product.
The ApolloX app is available on Apple Store or Google Play here.