Monero (XMR) Cryptocurrency: Definition, Mining, vs. Bitcoin

What Is Monero (XMR) Cryptocurrency?

Monero is a popular privacy cryptocurrency specifically designed to mask the identity of users and the details of their transactions. Unlike most cryptocurrencies, where transactions are publicly viewable on the blockchain, privacy coins employ various cryptographic techniques to obscure sender and receiver information. It also masks transaction amounts, making it difficult to trace the flow of funds while maintaining user anonymity.

While this enhanced privacy offers advantages like protecting financial freedom and combating surveillance, it also raises concerns about its potential use in illegal activities like money laundering. Monero and other privacy coins remain a controversial topic within the cryptocurrency landscape, with ongoing debates about their benefits and drawbacks.

History of Monero (XMR)

Monero (XMR) is an open-source, privacy-oriented cryptocurrency launched in 2014. Monero's blockchain is intentionally configured to be opaque and obscure transactions' origin, amount, and details by disguising the identities and addresses of senders and recipients.

Monero's origins are somewhat shrouded in mystery, as its original developers chose to remain anonymous. The project's launch in 2014 was spearheaded by someone known only as "thankful_for_today," as a fork of Bytecoin. Bytecoin is a privacy-focused cryptocurrency launched in 2012 that aims to provide users with anonymous and untraceable transactions using features similar to Monero's.

"Thankful_for_today" left the project shortly after, and Monero development was taken over by a group of anonymous developers. This team, led by Riccardo Spagni, a South African software engineer who goes by the username "Fluffypony" online, continued to refine the cryptocurrency's privacy features and introduced additional enhancements, such as the CryptoNightV7 cryptographic algorithm.

Concerns About Monero

Monero's privacy-enhancing features make it more complex than other cryptocurrencies, potentially hindering adoption among less technical users. The intricate nature of ring signatures, stealth addresses, and ring confidential transactions can be daunting for those unfamiliar with cryptography.

While Monero's privacy features protect user anonymity, they have also raised concerns and made it attractive for individuals and entities engaged in drug trafficking, gambling, hacking, and other illicit activities. According to blockchain analysis firm Chainalysis, XMR has become favored over BTC on darknet markets. These online underground economies sell illegal goods and operate on the dark web, an encrypted portion of the internet inaccessible through traditional search engines.

Monero's strong privacy features have attracted scrutiny from concerned regulators and governments. It has made it more difficult for law enforcement to identify suspects and the flow of illicit funds. For example, in 2021, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) designated Sodinokibi and REvil ransomware operators as sanctioned entities. The OFAC alleged that the cybercriminals used BTC and XMR to launder money stolen in the ransomware attacks.

How to Mine Monero

Monero uses the proof-of-work (PoW) consensus mechanism and incentivizes participation by using a competitive problem-solving approach similar to Bitcoin's mining. You can mine XMR (solo) individually for full rewards with dedicated hardware or join a mining pool for shared rewards.

Solo Mining

Solo mining is when you mine cryptocurrency individually (not part of a group). Relatively cheap computers such as CPUs and GPUs can be used to mine Monero, as mining Monero doesn't require fancy mining rigs that rely on ASICs, a costly form of mining architecture.

Monero's mining software clients XMRig and CSminer run on all leading operating systems, including Windows, macOS, Linux, Android, and FreeBSD.

Joining a Pool

Pool mining is when you join a group of miners and combine your computing power to increase your chances and share the rewards proportionally.

Some pools may have minimum hardware requirements to ensure efficient mining. More powerful hardware generally has a higher hash rate (computing power). Thus, it will contribute more to the pool, potentially earning you a larger share of the rewards.

Smaller mining pools, called micro pools, offer lower minimum payout thresholds. Micro pools can be helpful for miners with less powerful hardware, as it's easier to earn payouts even with a lower hashrate contribution. However, micro pools may have higher fees or be less stable than larger pools.

You could also rent a cloud miner from a cloud-based service provider. This can be a good option for beginners or those who don't want to invest considerable time and money. You pay a fee to lease the provider's hardware and have them configure and activate it with mining software. They handle the actual mining process. However, it's important to choose a reputable provider and to be aware of potential scams.

Monero vs. Bitcoin

While all Bitcoin and Monero transactions are publicly visible, BTC transactions are broadcast with a level of transparency that allows anyone to view the sender and recipient's address. This lets interested parties trace each transaction and the amount to its origin.

XMR transactions, on the other hand, are more private, and it is virtually impossible to link a Monero transaction to a specific sender or recipient. Monero employs advanced cryptographic techniques to obfuscate transaction details, making it significantly more difficult to trace the flow of funds.

Scalability is the ability of a system to handle an increasing amount of transactions without a decrease in performance. Bitcoin is not very scalable, as it can only handle a small number of transactions per second. Monero is more scalable, as it can handle more transactions per second.

Bitcoin and Monero both validate new blocks of transactions and expand their blockchains with a mining-based Proof-of-Work (PoW) consensus mechanism. But XMR's particular hashing algorithm, CryptoNightV7, is designed to be more resistant to ASIC miners and more optimal for individuals to mine profitably using general-purpose hardware, such as central processing units (CPUs) and graphics processing units (GPUs).

How Does Monero Improve Privacy?

Monero employs advanced cryptographic techniques to obfuscate transaction details, making it significantly more difficult to trace the flow of funds. These techniques include ring signatures, stealth addresses, and Ring Confidential Transactions (RingCT).

Ring Signatures

A ring signature is a cryptographic technique that allows a group of individuals to digitally sign a message anonymously. Ring signatures conceal the true sender of a transaction by creating a "ring" of potential senders, including the actual sender, requiring each ring member to sign the transaction. The signature itself does not reveal which ring member signed the message, making it impossible to identify the true sender.

To send XMR, the sender first selects a group of potential signers, including themselves. Each member of the ring generates a unique key pair for the transaction. The private key will be used for signing, while the public key will be used to verify the signature. The sender then creates a transaction, signs it using their private key, and includes the public keys of all the other members of the ring.

Anyone can verify the transaction by checking the signatures of all the public keys in the ring. Since each key can create a valid signature, it is impossible to determine which ring member signed the transaction.

Stealth Addresses

Stealth addresses are one-time addresses generated uniquely for the recipient of a transaction. They further enhance privacy by preventing the association of a user's public address with the transactions they make, unlike addresses used on other blockchains, which are linked to a specific user's wallet.

When a user sends XMR to another user, their wallet generates a unique stealth address for the recipient. This address is derived from the recipient's public key but is not directly linked to them. The sender then creates a transaction using the recipient's stealth address as the destination. Once the funds have been claimed, the stealth address is automatically destroyed, preventing it from being reused for future transactions.

Stealth Transactions

RingCTs hide the transaction amounts, adding another layer of privacy by making it impossible to determine how much Monero is being sent in each transaction and preventing funds from being tracked.

RingCTs create a "ring" of potential transaction amounts, including the actual amount being sent, and mixes the amounts, effectively hiding the financial details of the transaction. Prior to RingCTs, anyone analyzing the Monero blockchain could see the transaction amounts, even though the senders and receivers were hidden. This allowed for some level of transaction tracking and analysis, potentially compromising users' financial privacy.

The Bottom Line

Monero is one of the most preferred cryptocurrency choices for users who prioritize privacy. However, it has come under scrutiny for being too private, allowing users with bad intentions to remain even more anonymous than other cryptocurrencies.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.