The World of Cryptocurrencies – Part 2 – How Does Monero Work

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How Does Monero Work

Welcome back to our tour of the cryptocurrency landscape.  In the last post, we discovered Ether (and by relationship, Ethereum).  Ether is the “digital oil” that fuels the Ethereum network, upon which decentralized applications (or “dapps”) can be constructed and performed in a deterministic fashion thanks to Ethereum’s underlying Turing-complete blockchain.  Ether is used to monetize transactions among various entities within the Ethereum ecosystem. 

Nothing should be considered investment or financial advice. Enjoy the ride.

Privacy on the Blockchain – Monero

            While the main focus of Ethereum is decentralization of online application control by major entities, Monero takes a very different direction concerning its core emphasis – privacy.  According to their website, “Monero is the leading cryptocurrency with a focus on private and censorship-resistant transactions.”  The folks who develop Monero have specifically designed their platform to be highly secure and highly private so that users can send and receive money with no worries about intervention or interception by malicious parties.

After adopting and modifying the CryptoNote reference code, Monero launched in April 2014 as a viable alternative to other cryptocurrencies with the “goals of privacy and security first, ease of use and efficiency second” (according to their About section).  Monero is not meant to replace something like Bitcoin; it is meant to be an alternative for those who are supremely concerned with the privacy and security of their online transactions.

How Does Monero Work

What makes Monero different from common cryptocurrencies like Bitcoin or Ethereum?

  • Monero doesn’t employ a typical blockchain with addresses of entities and amounts transferred.  Instead, ring signatures, ring confidential transactions, and stealth addresses are used to decouple the network’s users from their pseudonymous identities online.  Because of this, it is extremely difficult (if not impossible) to determine the origin and destination of a transaction as well as the amount of XMR (Monero’s abbreviation) transferred.
  • Monero is fungible since all transactions are private by default.  In case you’re wondering what “fungible” means, it refers to a cryptocurrency (in this case) whose units are interchangeable with each other.  For example, if Alice has a pound of gold and Bob has a pound of gold of equal quality, they could exchange their gold and it still be worth the exact same amount – regardless of who possesses the gold.  Why does this matter for Monero?  Units of XMR can’t be blacklisted due to their use in previous transactions.  There are no “tainted bills” or specific XMR to be wary of since any XMR can be exchanged for any other XMR.

Cryptography On Monero

Monero incorporates several techniques that assist in the privacy of transactions on its network.  First, ring signatures are used to obfuscate the signer of a specific transaction.  In the future we will dive into the details of Monero’s cryptography, but for now this basically means that a group of users (as opposed to a single user) sign a message – and no one has any way of determining who in the group did the signing. 

If the cryptography is performed correctly, anyone in the group has an equal likelihood of having signed the message (i.e., this is the sender of the XMR in our case).  Who are the members of the pool?  Monero has a specific algorithm that pulls addresses at random to form a group of signers.  If an outside party attempts to discover the original sender of certain XMR, they will only be able to tell that one member of the pool sent it without knowing who within the pool did the sending.

Monero also utilizes ring confidential transactions (RingCT) to conceal transaction amounts.  RingCT advances the ring signature originally used by Monero and became a mandatory function of the network in September 2017.  It is quite a complicated topic, so we’ll post a link here and let you read more (we plan to cover this in-depth in a later post, so stay tuned!). 

Security of Monero

Finally, the security of Monero is further increased by stealth addresses.  Each time a sender wants to send XMR to a recipient, the sender must create random one-time addresses and relay payments to the recipient’s public address.  As XMR is received, each payment is placed in a unique location on the blockchain which cannot be linked back to the public address or any other addresses used in previous transactions.  Because stealth addresses are used by default (and are required in the Monero network), only a sender and recipient can ever know where a specific payment was sent.

Mining on Monero

Mining in Monero works similarly to Bitcoin and other cryptocurrencies by requiring miners to solve proof-of-work problems to validate transactions within blocks.  Until recently, Monero incorporated the CryptoNight hash algorithm, which was a feature of CryptoNote.  CryptoNight was originally designed to run using ordinary CPUs and GPUs. 

Over time, the original CryptoNight algorithm has been modified to keep it resistant to ASIC miners and allow ordinary users with standard equipment the opportunity to participate in mining.  A major reason for this is to ensure that massive centralization efforts won’t thwart the underlying desire for security and decentralization by the developers and users of Monero.  This has become a major source of contention in the Bitcoin network as several major players somewhat “own” the mining operations across the world – defeating Satoshi Nakimoto’s original vision for a decentralized, peer-to-peer monetary exchange platform. 

As of November 2019, the modified CryptoNight hash algorithm has been replaced by RandomX, developed specifically for Monero’s use.  CPU miners can see a dramatic increase in their mining capabilities, while a GPU miner will sit close to where it is currently in hashing power.  ASICs and FPGAs are even further discouraged by the new RandomX algorithm due to the incorporation of random code execution and memory-intensive techniques.

RingCT Transactions

RingCT transactions proved to be a barrier to efficient mining in the original implementation in Monero.  Since RingCT uses multiple signers and requires a signature both on the entire transaction and each subset of transaction bits, it became quite unwieldy to process increasingly hefty amounts of data.  This led to more intense computations and higher fees to validate blocks.  Luckily, a cryptography group based out of Stanford University authored a paper detailing a new avenue for accomplishing range proofs. 

These novel “bulletproofs” dramatically decrease the size of data for validating RingCT transactions.  As more and more ring signatures are added to a specific transaction, the size of data requiring validation increases logarithmically instead of linearly – this is a big deal!  It took about a year to get an implementation for Monero ready for production use, but after the incorporation of bulletproofs, average transaction sizes decreased by nearly 80%.  Not only were computation requirements downsized, but also Monero users saw a decrease in transaction fees.

Cryptojacking Exploits

Monero saw quite a bit of news flurry in 2018 due to the now defunct “cryptojacking” exploits made possible by Coinhive, a cryptocurrency mining service.  The service started by allowing site owners to incorporate a blob of JavaScript that loaded when a user opened a Web page and began full-scale mining as the user visited the page.  This led to increased power consumption for the user and batteries that were quickly drained for those on mobile devices.  Malicious actors quickly jumped on the opportunity to make money by surreptitiously stealing CPU cycles (so that they could mine Monero on a user’s system).  You might wonder,

“Why does this matter?” 

First, utilizing someone’s computer resources without their consent is fraudulent activity; users should be notified and agree to allow mining to take place on their systems. 

Hackers Doing Hacker Things

Second, hackers were injecting malicious payloads into Web sites and using other forms of trickery to silently place code on users’ systems such that it would run indefinitely – until a shutdown or reboot took place.  This led to laggy system performance, quickly drained batteries, and much increased power consumption (remember, extra power à extra electricity à extra money on the electricity bill this month). 

Luckily in March 2019, Coinhive was shut down.  They cited that a recent fork in Monero mining and a plummet in the value of XMR made their operation no longer profitable.  Albeit the idea to use spare CPU cycles began as a novel way of allowing sites to make money, it’s purpose quickly morphed into malware that profited off of unsuspecting visitors, and because Coinhive did not provide a swift response in quelling the bad actors, it experienced a quick demise.

Learn More About Monero

Monero is quite an interesting cryptocurrency specifically tailored for those who need or desire a high level of privacy in online transactions.  Having almost 6 years of development and improvements has led to a robust and trustworthy network of monetary exchange for anyone, anywhere.  Still want to learn more about Monero?  Check out a few of the links below:

Thanks again for reading!  In the next post, we’re going to take a closer look at Ripple – see you then!

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  1. […] from a cryptocurrency perspective, we are secure using Bitcoin, right?  Our transactions are encrypted and protected against modification, and the network […]

  2. […] back to our tour of the cryptocurrency landscape.  In the last post, we discovered Monero (XMR), a cryptocurrency primarily focused on privacy.  Rather than utilizing […]

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