Monero is a privacy focussed digital asset which is truly fungible because of the anonymity of transactions. Suppose you are a fugitive who has broken through the prison. The first thing that you would need is to get cash. All the cryptocurrencies including BTC can be traced to a particular wallet. The BTCs that are used in illegitimate transactions are thus ‘tainted’. Therefore, majority of cryptocurrencies do not give privacy and can be considered as ‘non-fungible’ because there transaction paths are unique. Monero is the true version of cash and any transaction done on the Monero network is truly anonymous.
Monero is based on some open source code known as cryptonote. This digital asset uses a technology called ring signatures. What it means is this: Monero only uses something called stealth addresses. This technology allows the creation of one-time unique public addresses on behalf of recipient. Every single transaction thus have a unique public address that cannot be linked to a single recipient. The technology is such that you still publish only one address for the public to send money. But all the transactions happen at the unique addresses. Using ring signature, the individual signing of all the transactions is hidden from the public view. Essentially, all XMR transactions are signed with some other random signatures to hide the real signature giving true untracability to the receivers wallet. Finally, the transaction amounts are hidden on the chain. This is done through the Ring Confidential Transactions protocol. This uses an improved version of previously used ring signatures technology now known as ‘a multi layered linkable spontaneous anonymous group signature’. This is akin to mixers but more sophisticated used in BTC transactions to hide the source of btc. Ring Confidential Transactions protocol was subsequently replaced with bulletproof protocol reducing the transaction value by 97% through a hard fork. This has strengthened all the positive attributes discussed in this article (more secure, faster, reduced block space). Bulletproof protocol might later be replaced with Seraphis protocol and a new addressing schemes called Jamtis a naming protocol) around 2024 through another hardfork.
The technology behind the same is complicated outside the scope of this paper.
To put it simply, think of a UPI app, where every time you send money to a particular phone number, it is transferred in the name of other phone numbers and intended person still receives the cash! The identity of both the sender and receiver is obscured from the public. Unlike other onchain transactions, XMR transactions are not recorded like others and are displayed as follows:
Unlike the creator of BTC Satoshi Nakamoto, who can start selling his cryptos and create havoc. While cryptocurrencies like BTC give more privacy than the other bank based applications used to make transactions, its not truly fungible. Because all the BTC transactions are public and a token might become tainted and hence might be non-fungible in a way. When you use cash, even though it has different serial numbers, but once its issued by the bank they will no longer know where cash transactions were made. But that is not the case with BTC. In that sense, monero is truly fungible and untraceable. XMR tokens are actually identical.
Unlike BTC, which have the block size limit of 1 MB, XMR blocks have no size limits. But XMR has also maintained the algorithm in such a way that the block rewards, unlike Bitcoin, would never go to 0 (would reach .6). This is akin to converting a simple road from roadway to high way during peak hours. If number of transactions are low, the block dynamically sizes to smaller size. Alternatively, when the number of transactions are high, it can adjust to higher blocksize. The fees charged is also dynamic. Per transaction fees changes with the number of transactions. In peak hours, they tend to be lower to protect the network from transactions spam on the network.
Also, BTC is like a religion which is not ready to evolve and remain loyal to “Satoshi’s principles” while XMR is an ever evolving creature which constantly upgrades to become a better version of itself.
Both the protocols work on proof of work (PoW). Bitcoins have special mining equipment (ASICs) but XMR can be mined on normal pcs. Easier mining makes the chain more decentralized because there can be more participants.
Different mechanisms for payment: XMR have more private keys, making the storage difficult and chain more difficult to access.
Therefore, the following can be the target audience:
1. Person transacting on dark web: They would like more privacy in their transactions
2. Black economy participants: People who transact illegally or in illegal goods.
3. People who want privacy with minimal government interference
4. Techies: There have been cyber punks who believe democratization of internet. The true democracy would also mean freedom to contract and freedom to transact.
The following could be the use cases of this:
1. Store of value: Just like gold and BTC, it could be used as store for value as a truly non fungible digital asset.
2. Medium of exchange: Same as BTC, DAI, USDT, BTC cash, $, INR.
3. Medium of transact on DEXs. This would reduce the dependency of DEXs on central authorities.
The success in my opinion has 2 criteria, the market cap and adoption.
· The market cap will increase with time as more people start transacting over the internet because of the reasons discuss before.
· Adoption is a big hurdle with tight regulation, high competition from other (non) digital assets and limited use cases. This becomes more problematic with world becoming more surveillance heavy, stricter ATF regulations and more convoluted KYC guidelines.
· More institutions are investing in this and more XMR being considered by the trusts.
· Easier to mine while most of the competitors require more resources to mine.
· Monero hard fork reached a consensus to V 15 to increase the ring size from 11 to 16 making the network more secure and private.
· Non centralization (some core team is centralized, other decentralized)
· Faster technological adoption.
· More centralized exchanges are delisting XMR.
· Atomic swap makes the swap between BTC and XMR on chain.
· User friendly frontend tools/ applications are being built to facilitate XMR adoption
· Integration with more chains such as ‘Thorchain’ increasing the demand and liquidity.
By Siddharth Dalmia
The Startup Sherpa