What is Monero? A Beginner’s Guide

What is Monero? How does it work? Is it completely anonymous? Why would I even need
an anonymous coin? Well stick around, in this episode of
Crypto Whiteboard Tuesday, we’ll answer these questions and more. Hi, I’m Nate Martin from 99Bitcoins.com and welcome to
Crypto Whiteboard Tuesday where we take complex
cryptocurrency topics, break them down and translate them into plain English. Before we begin, don’t forget to subscribe to the channel and click the bell
so you’ll immediately get notified when a new video comes out. Today’s topic is Monero, a private decentralized cryptocurrency. But what does “private” actually mean? First, let’s clarify the difference between
privacy and anonymity.

Privacy means that you don’t want others
to know what you’re doing. While anonymity means that
you don’t mind that people know what you’re doing, you just don’t want them to know that
you’re the one doing it. For example, privacy is when you lock
the door to a bathroom because you want to keep
what’s going on in there…. well… private. Anonymity is when you post data
that can’t be linked back to you on the web in order to bring something
to the public’s attention. If you look at Bitcoin, it’s certainly not private. The Bitcoin blockchain
is completely public and all transactions can be viewed
by anyone on the web. If you want to keep your privacy
in Bitcoin, you’ll have to use transaction mixers,
VPNs and a variety of other methods. Bitcoin is also not
completely anonymous. On the one hand, the blockchain shows
how many Bitcoins were sent from which address and when. On the other, without any additional information it’s impossible to connect
a Bitcoin address to a real life identity (also known as an IRL).

So Bitcoin is pseudonymous. Enter Monero. Monero aims to be
a private cryptocurrency that doesn’t expose
who sends how much to whom. Transactions on Monero
are untraceable and unlinkable, so you can’t tell
where they originated from and you can’t connect
any two transactions together. Now, you might be asking yourself
who really needs a private coin? Isn’t that stuff only for criminals? Well, while criminal activity
can benefit a lot from a private cryptocurrency, there are more than enough
legitimate reasons for privacy as well. For example, with the amount of data being displayed on blockchains like Bitcoin
and Ethereum, it's become easier these days to identify patterns,
map real life identities, connect between addresses and uncover behavioural information
about users.

So, if you don’t like companies
analyzing your data in order to map out your behavioural
or purchasing patterns, you may consider using
a private cryptocurrency. Additionally, since all address balances
are completely transparent, you may become subject to attacks if you hold large amounts of Bitcoin. Another thing to consider
is market prediction. If I know a certain address
belongs to an exchange, I can track it for incoming transactions. If I see a large amount coming in, then I can assume that a big sell order
may be on its way and short the currency for profit. In a truly perfect market,
such loopholes wouldn’t exist. And finally we come to
the issue of fungibility. Fungibility means that currency units should be completely interchangeable
with one another. Simply put, if I have a $20 bill, it shouldn’t matter to you
where it came from or when it was made. A $20 bill is just a $20 bill, and it’s equivalent to any other $20 bill
you can find. However, in Bitcoin, for example,
you can trace each coin back, even as far as to when it was first created
as a mining reward which is known as
the Coinbase transaction.

So, if somewhere along the way
this Bitcoin was used for illegal activity, you may find some
law enforcement agency knocking on your door as part of some investigation
they are running. While this is all theory for now, it could happen
since Bitcoins are 100% traceable. So you might have different prices
for freshly minted Bitcoins as opposed to “used” Bitcoins. For Bitcoin to truly become a currency, it will have to deal with
this fungibility issue. On the other hand, a private coin that can’t be traced
has complete fungibility.

As you can see, there are numerous use cases for using
a privacy coin such as Monero. So what is the difference
between Monero and other privacy coins
like Dash or Zcash? Well, while other coins
like Dash and Zcash offer the option for private transactions, in Monero all transactions are private
without exception. Monero, meaning “coin” in esperanto,
started out in 2014 as a fork of Bytecoin, the first private cryptocurrency
to be created.

The Monero protocol obfuscates the 3 parts of any cryptocurrency
transaction – the sender, the receiver
and the amount sent. Let’s see how this is done for each part. To obfuscate the sender’s identity, Montero uses ring signatures. When a person signs
a Monero transaction, their signature is combined with
past signatures from the Monero blockchain. These act as decoys
and make it impossible for an outside observer to determine
who actually sent the transaction. The amount being sent is obfuscated
by ring confidential transaction, or ringCT for short.

I won’t go into the technical aspect
of how ringCT works, but suffice to say that instead of broadcasting
the actual amount being sent, the user transmits only a small
random looking piece of information. This information is enough to verify that
the amount being sent is legit while keeping the actual amount
private. And finally,
we want to obfuscate the receiver. This is done through
the use of stealth addresses. A public Monero address
is a 95 character string that starts with a 4. However, when I send funds
to that address, the funds are actually sent to
a different address. So for example,
if I’m the recipient, funds are sent to
a one time stealth address that is derived from my public address.

This creates a separation between
my public address and the funds sent to me
so no one is able to know my balance. Only the recipient’s private key
“knows” they can spend funds from that 1 time stealth address and each time
the Monero wallet launches it will scan the blockchain
for addresses it can spend in order to know the actual balance. While all of the transaction data
may be obfuscated, the sender’s IP address
can still be tracked. That’s why there’s one additional feature
on Monero’s roadmap: Kovri. Kovri reroutes your transaction
through multiple virtual nodes so that your IP address
is also obfuscated. Kovri is not yet integrated with Monero
but is in active development. So there you have it, a completely private cryptocurrency
that hides the sender’s address and IP, the amount being sent
and the recipient's address. Now let’s talk a bit about
Monero’s currency XMR. Similar to Bitcoin, XMR is mined through computers that guess the solution
to complex math problems, also known as Proof of Work. However,
the algorithm used to mine XMR, called CryptoNight, is completely different than
the SHA-256 algorithm used to mine Bitcoin.

CryptoNight is an ASIC resistant
algorithm. This means that
you won’t be able to mine more XMR if you have a more powerful computer. Even with a GPU, your mining advantage
won’t be as substantial as it would be with other coins. This makes XMR still open to mining
with your personal computer, something that is completely
out of the question with more popular coins
like Bitcoin or Ethereum. Since CryptoNight allows
personal computers to mine Monero, it quickly became a very popular option
for browser mining. Browser mining occurs
when a site that you visit uses your computer’s CPU to mine
in the background while you’re visiting the site. You can learn more about it
in our Bitcoin mining tutorial. Also, unlike Bitcoin
which is limited to 21M coins, there’s no limit to how many XMR
can be produced. New XMR is issued each time
a block is mined, every 2 minutes on average.

The actual reward varies
and decreases over time. By May 31, 2022,
18.4 million XMR will be in circulation and the reward size will become fixed with 0.6 XMR being distributed
with each new block. That’s it for today’s episode
of Crypto Whiteboard Tuesday. Hopefully by now you understand
what Monero is – A private decentralized digital currency. I also hope you have a better grasp
of why privacy is important not only for criminals. You may still have some questions. If so, just leave them
in the comment section below. And if you’re watching this video
on YouTube, and enjoy what you’ve seen, don’t forget to hit the like button. Then make sure to subscribe
to the channel and click that bell
so that you’ll be notified as soon as we post new episodes.

Thanks for joining me
here at the Whiteboard. For 99bitcoins.com,
I’m Nate Martin, and I’ll see you… in a bit..

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