Monero is one of the projects in the cryptocurrency space that provides some real blockchain innovation. Unlike other projects that make minor improvements to (or straight up copy) the Bitcoin algorithm, Monero takes a giant leap forward for user privacy. In this post I'll dive into what makes Monero different and why it's a game-changer.
What Monero Provides
When talking about Monero, one of the first words that comes up is fungibility. This basically means that any Monero coin is perfectly interchangable for any other Monero coin. This isn't true for many other cryptocurrencies. Due to the public nature of the ledger in most projects, coins can be "tainted" by their past transactions (i.e. involvement in illicit activity). The only guaranteed "clean" coins for many blockchains are those that are newly minted as part of a block reward. With Monero however, because the transactions are kept secret by default, the only people that know of a transaction are the two making a transaction. This means to any outside observer, the coins are identitical.
An analogy for this is, if you were to buy pizza with Bitcoin, then anyone who knows your wallet address (other people you transact with, government agencies, etc) would also know that you purchased pizza. It's like making a global declaration, persisted by the bitcoin network, that you bought pizza. Purchasing the same pizza with Monero however, would only be known to you and the pizza shop.
If all you ever buy is pizza, then maybe Bitcoin works just fine for you, maybe you don't care if your health insurance provider knows how much pizza you buy. For the rest of us, there is sure to be a conflict of intrests somewhere down the track such that you would prefer to keep your transactions private.
Secrecy of Wallet Balance
Another side-effect in the pizza scenario, is that by paying with Bitcoin the receiver is aware of how much money is in your wallet. Merchants could use this to price-discriminate based on the fact that you appear to be very wealthy and can clearly pay more for your pizza next time. This turns dangerous when we look at peer-to-peer transactions (i.e. Craigslist/Gumtree). If a criminal were to work out when transacting with you that you had thousands of dollars in your control, they might be motivated to take advantage of you. From such individuals, no level of encryption will be able to save your funds.
If you do not wish to be publicly declaring how much coin you have in your wallet, Monero is what you want. Only the value of the transaction is visible to the recipient, not how much you have at your disposal.
Transaction fees are an issue that make Bitcoin and Ethereum untennable for day to day transactions. Monero has scalability built in from the get go with dynamic block sizing. The algorithm allows the block size to steadily increase with demand whilst still providing incentives to miners to keep the block size low. This balance helps keep fees low for users (~$0.003 USD currently). See more on transaction fees here.
Monero also opts for a shorter transaction time of 2 minutes, rather than 10 minutes for Bitcoin. This results in a shorter time to reach X number of confirmations on the blockchain. This is by no means the state of the art for transaction times however, Nano still holds the crown with near-instant transaction times.
With the digitization of monetary spending with credit cards over the last 50+ years, we have moved to a centralized model. The money you store in your bank account and spend, is visible to these organisations that can then discriminate how you spend your money and control how that information is used. Your government, including tax offices and law enforcment also have access to this information. All freedom to receive cash and spend it as you please has been erased in the era of the credit card.
Monero solves this problem, by putting you back in control of the privacy of your finances. By moving to a decentralized model, you can trust that the network is keeping your money safe, rather than some organisation with less than your best interests in mind.
How Monero Works
This short video from the official Monero project does a great job at explaining the technical details of how the Monero network works. A short technical summary is:
- Your wallet contains a private key that can prove ownership of "outputs" from previous transactions on the blockchain.
- A transaction is made by taking an output from a previous transaction as input to a new transaction.
- The transaction is disguised by being intermingled with other transactions on the network.
- With stealth adddresses, you are able to transact on the Monero network without ever having your wallet address associated with any transactions.
For those interested in purchasing Monero, they can check out the exchange options available at getmonero.org. Note that in many countries purchasing Monero directly with fiat is prohibited, so you have to go through one exchange to buy Bitcoin/Ethereum/Litecoin/etc and then transfer to another to purchase Monero. Buying cryptocurrencies on any government approved exchange normally creates a papertrail of your funds visible to your government. If you would like to not create such a paper trail, you should instead look into peer to peer purchase options, such as localmonero.
What is Holding Monero Back
Adoption, as with many cryptocurrencies, is the main blocker holding Monero back from true success as a cash-replacement. It's a steep up-hill battle for Monero compared to other crypto-currencies here since many governments have black-listed the currency due to it's untraceable nature. The IRS has gone so far as to invest money into trying to break Monero. Since it is difficult for users to acquire Monero, it is also difficult for companies to receive it as a payment method since they have very few simple government approved ways to cash it out.
Disclosure: I own a small amount of Monero, Bitcoin and Nano.
I personally have a great outlook for Monero as a cryptocurrency, and believe it is undervalued at a $4B market cap (making it #32 in the rankings on coinmarketcap). However my overall view of the cryptocurrency market is that Bitcoin and Ethereum will continue to be the "gold standard" when it comes to investing in cryptocurrencies. This is primarily because they consistently outpace the market for long-term gains.
With many similarities to the privacy characteristics of cash (and then some), Monero truly differentiates itself from the rest of the cryptocurrency ecosystem. The algorithms applied in the Monero network make it easy for users to transact without worrying about who can view their transactions or their wallet balance. Low fees on the network and a unique approach to scaling also mean that Monero is suitable for small day-to-day transactions unlike the big players.
As much as Monero dominates technically, it faces a political battle against governments that wish to control the movement of funds within their borders. This makes adoption difficult and often leaves the currency viewed by many as "the cryptocurrency used only by criminals".