Bitcoin earned a reputation early on for being the digital money of choice for criminals seeking to evade the prying eyes of law enforcement. But there are also legitimate reasons for wanting privacy— to avoid his employer getting wind of his plans, Edward Snowden, for example, used bitcoin to pay for the servers where he stored the data on the NSA mass surveillance program.
Whatever the reasons, demand for privacy is strong. But it quickly became clear that bitcoin’s public transaction ledger was not ideally suited for privacy. And so a host of “privacy coins” stepped in to fill the gap.
“Privacy coin” is now an entire genre of cryptocurrency, with dozens of currencies competing for a piece of the cryptocurrency market. Monero is the biggest of these currencies by market capitalization.
The privacy coin market is fiercely competitive, with everyone trying to tout the merit of whatever coin they are invested in, so it can be hard to figure out what is really going on. This article is intended to help you to figure out what is really going on with Monero. Following is a brief introduction to the privacy coin, its history, and some of the most common arguments for and against it.
The Humble Origins of Monero (XMR)
Monero was founded in April of 2014, when a member of the Bitcointalk forum created Monero by copying the code of another cryptocurrency called Bytecoin. The founder disappeared soon after the currency went live, and a loose-knit community of developers took over the task of building up Monero.
Monero was first developed at a time when bitcoin mining was becoming increasingly difficult due to the growth of the bitcoin network. Mining was becoming the domain of professional miners with specialized equipment, so Monero was designed to operate with a special algorithm which gives an advantage to ordinary computers. This was intended to allow ordinary people without specialized hardware to mine.
At this time, many miners had shifted from mining on personal computers to using graphics cards, since CPU mining was no longer efficient. The idea was that miners could use their graphics cards to mine Bitcoin, and mine Monero on the side, thus achieving higher productivity on their mining rigs.
Aside from its privacy features, this was one of the arguments in favor of Monero, but it didn’t take long before the mining hardware market caught up. Now Monero is mostly mined by professional miners, just like Bitcoin. However, the Monero community is still trying to keep out the heavy duty miners and make it accessible to the little guy.
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Monero was originally based on the Cryptonote protocol, a Proof of Work algorithm similar to Bitcoin’s. Monero transactions are secured by “ring signatures,” which use signatures from multiple addresses to create a unique key, making it difficult or impossible to know which address signed the transaction. Furthermore, zero knowledge proofs are used, which enables users to transfer funds to each other without exchanging any information that could potentially be used to identify them.
Monero also features “stealth addresses” which add even more privacy by automatically creating addresses which are used only one time. Ring Confidential Transactions, known as RingCT’s for short, are also used to mask the amounts of transactions, making it even more difficult to link transactions to their senders and recipients.
Arguments in Favor of Monero
Bytecoin, from which Monero was forked, made some advances in privacy technology, but it was subject to a hefty “pre-mine.” This means that the creators control a significant percentage of the total supply of coins. This is often a concern for cryptocurrency investors, because it opens the door to manipulation, since those controlling the supply can manipulate the price or engage in pump-and-dump schemes.
Decentralization is a hot topic in the cryptocurrency community for reasons beyond manipulation; it also translates to security. People attempted to create electronic currencies in the past, but all attempts before Bitcoin were shut down by governments. But because cryptocurrencies are distributed networks spanning many countries and many of the operators are anonymous, it is impossible for any government to take down the whole network.
The fear is that if a currency becomes highly centralized, it will become vulnerable in many ways. It could make it vulnerable to government action, or the people controlling the network can try to change the supply, causing inflation. This would defeat the original purpose of cryptocurrency, which was designed as a counter-balance to perceived mismanagement of currencies by central banks and governments.
In a currency with a pre-mine, there is a strong incentive for the creators of the currency network to maintain it, and the incentive for outsiders to participate in the network and become “stakeholders” in the currency are much lower. This leads to fears that currencies with heavy pre-mines will tend towards centralization.
Monero did not have any such premine, which earned it points with many investors and cryptocurrency enthusiasts.
While some other privacy currencies claim to have superior technology, Monero is arguably the most widely used privacy coin. In 2016, Monero payments were officially added to the dark web marketplace Alphabay, helping to fuel a 2,700% price increase. Alphabay has since been shut down, but Monero is still one of the most visible privacy coins used for black market internet transactions.
Arguments Against Monero
Privacy Features Added to More Established Currencies
One argument against Monero’s potential staying power and growth potential is the possible adoption of privacy technologies in conjunction with Bitcoin or other cryptocurrencies that already have more traction. If a protocol is added to Bitcoin which enables superior privacy features, there would be little reason to use Monero.
Some technology of this kind is already under development, and other leading cryptocurrencies like Litecoin are now working on implementing privacy protocols. If successful, these efforts could hit Monero’s market share. Alternatively, second layer solutions like Bitcoin’s Lightning Network may become more widely used and integrated with privacy-protecting features.
Monero has frequently been criticized for its lack of scalability, although this is a tradeoff that most highly decentralized networks have to make. Because Monero’s ring signatures use decoy addresses, there is much more transactional data than in the case of a non-anonymous transaction.
This means that the size of the Monero blockchain requires more storage space, which must be stored and transmitted by the nodes that form the network. This is not a problem now, but Monero’s transaction volume is currently only a fraction of Bitcoin’s. However, the Monero developers are aware of these issues and are working on solutions.
Flaws in Privacy Protocols
Some researchers have found flaws which can potentially be used to deanonymize some of Monero’s transaction data. These flaws could theoretically be exploited to get data on some Monero users.
The IRS is reported to be working on methods for cracking Monero’s privacy and anonymity. If regulators did find some way to deanonymize Monero transactions, this would certainly lead to a decline in Monero’s appeal and value.
As long as government overreach into people’s private lives continues (and it doesn’t appear that will be changing any time soon), there will surely be continued demand for privacy. Whatever happens, you can be sure that the Monero community will do what they can to stay in the race.
For the time being, the privacy arms race goes on, and Monero is holding on to the lead.
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