Monero Explained: What It Is and How It Works

Last updated on April 5th, 2024 at 11:21 am

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Since its humble beginnings in 2008, cryptocurrency has become increasingly popular over the years. Blockchain technology and crypto’s decentralized model captured the imaginations of developers, researchers, and investors alike. While Bitcoin is the first and arguably most popular among cryptocurrencies today, users and traders now have a bountiful selection of cryptos to choose from. One cryptocurrency, in particular, has been making waves in the crypto industry for its highly advanced privacy features—Monero (XMR).

As Monero continues to become more popular, learning more about this cryptocurrency may help traders who are looking to bolster their portfolio or users who are seeking a more private form of crypto. For a quick rundown of what it is and how it works, continue reading below.

What is Monero?

Monero is an open-source cryptocurrency that is mainly oriented toward privacy. It is one of the first cryptos that offered this feature. This capability is a significant development in the field of cryptocurrency, where everything runs on blockchain technology. 

In blockchain, all transactions conducted are recorded in a public ledger that all users can access. This means that information such as the identities of the sender and receiver, along with the amount exchanged, can be viewed by other users. Monero turns this concept on its head by offering a form of anonymity to all parties involved. Thus, traders and users can use their XMR wallet and transact more privately online.

One other key benefit to using Monero is that its coins are fungible. It means that two units of currency are mutually interchangeable. Cash is a classic example of a fungible asset since a one dollar bill has the same value as another dollar bill. XMR’s fungibility protects users from having their coins blacklisted, in case their coins have been used in illicit activities, such as gambling or drug sales.

Over the years, Monero has made a name for itself as a pioneer for privacy-oriented features in cryptocurrency. Its avid pursuit of new features and technologies in the crypto space captured the interest of not only researchers and cryptographers, but also potential investors seeking to learn more about the crypto space and its potentials.

How Does It Work?

Firstly, XMR is not the only cryptocurrency that offers privacy features. Cryptocurrencies such Dash and Zcash also offer a degree of anonymity for their users online. However, the technology and method to which these features become possible can vary from one currency to another. 

For Monero, their methods lie in obscuring user information on the blockchain. This makes the blockchain opaque, and as a result, it becomes harder to trace the individuals involved in a transaction. Here are the primary methods they use to achieve this result:

Ring Signatures

Ring signatures refer to the technology that makes data obfuscation feasible. In this process, Monero mixes an individual’s digital signature with those of others before recording it in a blockchain. It does this by combining account keys from the sender and the blockchain’s public keys. As a result, it becomes difficult to pinpoint who signed the transaction, effectively hiding the user’s identity.

Stealth Addresses

In Monero, every user has a public address that works similarly to an account identifier. To protect user privacy in transactions, XMR implemented stealth addresses in 2017. Stealth addresses refer to one-time public keys that are automatically generated by the Monero platform. Through them, transactions cannot be linked back to the sender or recipient. Moreover, only these two parties have the key to determine where the payments are sent in the blockchain.

Ring CT

Ring CT is short for Ring Confidential Transaction. Introduced in 2017, the primary aim of this feature is to hide the amount exchanged in a transaction. Moreover, it also introduced an upgrade for ring signatures, which allows for hidden origins, destinations, and amounts.

What Are the Challenges of Monero?

At this point, it becomes clear that Monero has a lot of useful features when it comes to protecting user privacy. However, Monero’s greatest strength might also be its Achilles heel. Because XMR platforms guarantee anonymity to all of their users, individuals who engage in criminal activities see it as a lucrative tool for underground transactions. Case in point, before popular darknet markets AlphaBay and Oasis were shut down, authorities found increased XMR use. 

As such, several figures and institutions have called out Monero and expressed their unease on its lack of regulation and how it could be used for illicit activities. The government, in particular, raised concerns on how it could fund illegal and even dangerous enterprises, particularly drug trafficking and terrorism.

All things considered, it becomes clear that Monero is both a subject of fascination and debate. Some find it useful while others are more skeptical. It is, after all, simply a technological tool that can be used for various means—both good and bad. 

Monero itself is not illegal, but the issues surrounding it raises important questions about the role of cryptocurrency in society. To find out, developers and researchers will have to continue studying this technology and continue pushing boundaries.