What is Monero (XMR) and How Does it Work? | KuCoin Crypto Gem Observer

2022/07/15 07:17:05

The existing financial system has made significant progress to date. However, it fails to address some crucial needs, including anonymity and decentralization. Hoping to address these issues, Satoshi Nakamoto launched Bitcoin (BTC), a peer-to-peer (P2P) network, allowing users to send money back and forth without the interference of a central authority.

Although Bitcoin successfully implemented the P2P model and distributed the control of its network to Proof-of-Work (PoW) miners, it fails to address the anonymity requirement. This shortcoming emanates from Bitcoin leveraging a public ledger, which makes it possible to trace transactions.

Looking to solve this puzzle, a group of developers launched Monero, a cryptocurrency that ensures transactions are both untraceable and unlinkable. In the Monero network, users don’t need to cooperate with other users or trusted third parties to make transactions.

What is Monero?

Monero launched in 2014 as BitMonero before its developers forked the network and shortened the name to its current form. The cryptocurrency focuses on delivering private and censorship-resistant transactions. All Monero users are anonymous by default and do not have to worry about censorship.

The decentralized design of Monero eliminates problems like wire transfer fees, fraudulent chargebacks, and check clearing fees, among others. Additionally, decentralization ensures Monero operates across borders without restrictions from any jurisdiction or central authority.

Furthermore, Monero is fungible. This means users can interchange two XMR tokens because they have no distinguishable differences. For better understanding, take two $1 bills as an example. While they have the same value, their serial numbers are different.

This feature helps prevent any attempts to trace Monero because the tokens do not have unique identifiers. To this end, no entity can blacklist XMR involved in fraud or any other illicit activity. The fungible nature of XMR ensures the cryptocurrency’s users remain safe even as analytics firms increasingly get better at gleaning data from public blockchains.

How Does Monero Work?

To achieve complete anonymity, Monero leverages three technologies. These are Stealth Addresses, Ring Signatures, and Ring Confidential Transactions (CT).

Stealth Addresses require and allow the sender to create random one-time addresses for all transactions. The recipient can publish just one address and have their incoming payments go to different unique addresses on the blockchain.

Notably, these addresses cannot be traced back to the recipient or any other addresses in a transaction. In simpler terms, Stealth Addresses ensure only the sender and recipient know a transaction’s details.

After creating a Monero account, users automatically get a private view key, a private spend key, and a public address. The view key displays all incoming payments, while the spend key is for sending payments. On the other hand, the public address receives payments. Monero uses the spend and views keys to create a user’s address.

Ring Signatures are digital signatures that any member of a particular group can use to sign a transaction. It is computationally impossible to identify the group member that used their keys to sign a transaction when using Ring Signatures.

This feature further boosts anonymity in Monero because a Ring Signature leverages users’ account keys and other public keys (outputs) from the blockchain. The network then uses a triangular distribution method to ensure any outside observer cannot tell which of the possible signers in a signature group belong to a specific account.

RingCT hides transaction amounts on the Monero network. Monero implemented RingCT in January 2017 and made this feature mandatory for all transactions in September 2017.

RingCT features a new version of Ring Signatures dubbed A Multi-layered Linkable Spontaneous Anonymous Group signature. This functionality conceals the amount, origin, and destination of a transaction.

Who Created Monero?

Monero is the work of five developers. Three were anonymous, and two were publicly known. At the moment, Ricardo Spagni, one of the known developers, is listed as Monero’s founder and project lead.

Spagni has an academic background in informatics and logistics. He first got involved with Bitcoin in 2011 before dabbling in other crypto-related projects in 2012.

What is XMR Used For?

XMR, the native token of the Monero network, offers users complete anonymity, fulfilling the promise of cryptocurrencies. Apart from privacy, XMR is fungible. This feature ensures even large organizations can accept the token because there is no way of telling which coins were involved in a specific event.

The XMR token works beyond all borders allowing people across the globe to save and pay without the interference of governments and centralized financial institutions. Additionally, investors that believe more users will embrace cryptos that offer complete privacy can add XMR to their portfolios and wait for their investments to pay off.

What Makes Monero Unique?

Unlike other cryptocurrencies, Monero is untraceable. This feature ensures XMR holders do not have to worry about a third party looking into their transactions or account information. Moreover, their accounts remain immune to powerful central entities.

On top of this, XMR’s fungibility means each token is indistinguishable from the next, preventing censorship from governments and banks.

Closing Thoughts

By offering users complete anonymity, Monero stands to gain favor among privacy enthusiasts within the crypto industry. Also, Monero’s security and low transaction costs make it an ideal token for cross-border payments.