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What is Monero (XMR) and How Does it Work?

Mohammad Musharraf by Mohammad Musharraf
February 23, 2021
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What is monero article

Bitcoin’s release in 2008 sparked a flurry of innovations, pervading the domains of technology, finance, and so on. Although several fundamental concepts had been conceived, discussed, and developed for long, an inadequate technological framework hindered their actualization. Bitcoin marked the first stable implementation of a fully-decentralized, peer-to-peer financial system. 

Notwithstanding Bitcoin’s significance and achievements, the network has often been accused of crucial limitations in terms of privacy. Indeed, Bitcoin transactions are merely pseudonymous and not anonymous. Moreover, they are ‘out in the open’, so to say. Against this backdrop, several privacy-focused blockchain-cryptocurrency projects have emerged, out of which, this article discusses the leading one — Monero.

Overview for Fast Readers

  • Monero is one of the pioneering blockchain-cryptocurrency platforms, based on Nicolas van Saberhagen’s idea of CryptoNote. 
  • Launched in April 2014—named Bitmonero at the time—Monero is a privacy-prioritized network, secured using a Proof of Work (PoW) consensus mechanism. 
  • At the time of writing, Monero’s native XMR token is priced at $136.95, with a market capitalization of over $2.4 billion.

Monero: Definition & History

In 2013, Nicolas van Saberhagen released CryptoNote’s white paper, detailing a technological innovation to improve certain “Bitcoin drawbacks.” Although CryptoNote withered away following persistent controversies, its codebase was further developed to build Monero. 

At the time of its initial launch in April 2014, the project was named Bitmonero. However, this was also subjected to severe criticisms. The present name, Monero, derives from the Esperanto term for “coin”, and in doing so, represents the project’s community-oriented vision.

Now, then, comes the inevitable question—What is Monero? In simple terms, Monero is a PoW-based blockchain platform, distinguished from its peers by its innovations in privacy and fungibility. XMR is the native cryptocurrency of Monero’s open-source and fully non-permissioned ecosystem. Apart from its token, Monero facilitates other services, including mining pools, XMR exchanges, block explorers, and applications for Android, iOS, Windows, Linux, and so on. 

How Does Monero Work?

In general, Monero works in ways that are fundamentally similar to Bitcoin. In other words, newly-initiated transactions are verified in a decentralized manner, by a randomly and globally distributed network of computers (nodes). However, apart from these basic similarities, Monero’s functioning is defined by several distinguishing features. 

Safe Peer to Peer Transactions Worldwide

Confidential Transactions & Fungibility

Monero-based transactions are completely confidential and anonymous, meaning that it’s theoretically impossible to link them back to the involved counterparties. Monero achieves this using Ring Signatures. The process combines multiple signatures—including the sender’s—into a single transaction. Consequently, the signatures become effectively indistinguishable and one cannot definitively identify the sender by looking at the transaction recorded on Monero’s public blockchain.

Recent enhancements in Confidential Transactions (CT) also enable Monero to mask the transacted amount. Furthermore, Monero leverages Stealth Addresses, which allows users to create single-use accounts for transactions, identifiable only with their private view key. 

CT and Stealth Addresses combined, among other factors, imply that XMR tokens are completely fungible—that is, perfectly identical to each other and thus also interchangeable. This restricts chain analysis, the categorization of XMR tokens as good and bad coins, and other similar privacy-hampering practices.

ASIC Resistance & Scalability

ASIC stands for Application Specific Integrated Circuit, which is a class of specialized mining hardware. Extensive resource consumption, both in terms of costs and energy, is the biggest drawback of ASIC-based mining. Bitcoin’s mining architecture is an example of ASIC-based mining, which can usually accessible only to professional miners. Moreover, the involved costs and efforts imply serious scalability trade-offs. 

On the contrary, Monero participates in a broader movement towards ASIC resistance, primarily on account of its alternative mechanism, namely CryptoNight. While opposing the use of ASIC chips, the protocol facilitates profitable GPU and CPU based mining. This enables ordinary users to mine Monero, apart from ensuring greater scalability, financial inclusion, and an optimally-decentralized network. 

Monero (XMR) Market Statistics (as of writing)

  • Rank: #19
  • Total Supply: Not Applicable
  • Circulating Supply: 17.8 million
  • Price: $136.16 
  • Market Capitalization: $2.4 billion
  • Mining Reward: 2.1500 XMR
  • Next Halving: By a complex process that is beyond this article’s scope, Monero’s algorithm reduces mining rewards after each block. However, after mid-2022, the amount will be fixed at roughly 0.6 XMR per block. 

Advantages of Monero

As a token listed for market trading, Monero (XMR) partially derives its value from demand-supply dynamics. Nevertheless, some of the project’s biggest advantages play a major determining role in terms of its intrinsic value. For clarity and proper understanding, it’s necessary to read this section in relation to how Monero works.

Privacy

Transactions in XMR are untraceable, unlinkable, and analysis-resistant. As the crypto-community has been arguing for long, privacy should be regarded as a basic human rights. On account of the aforementioned features, Monero has been a significant forward-step in this regard. 

It allows users to transact freely, without the fear of being censored or monitored in any way—that is, by exercising complete autonomy and financial freedom. Moreover, Monero users also have the authority to share transactional details with counterparties of their choice, which is often a necessity for business purposes.

Monero Anonymous Cryptocurrency

Cost Minimization & Speed

Monero has Dynamic Scalability mechanisms in place, which ensure that the system can support an increase in traffic without a proportional increase in costs. In other words, more traffic on Monero’s network doesn’t necessarily mean exorbitant transaction fees, as is the case with Ethereum, among others.

On the other hand, transactions on Monero are settled faster than a majority of its counterparts. As opposed to Bitcoin’s 10 minutes, new blocks are created on Monero roughly every 2 minutes. Theoretically, Monero’s dynamic block size implies that it can handle unlimited transactions per second. However, according to certain estimates, the actual TPS is said to be 1600-1700 TPS. Most importantly, Monero achieves these without compromising on security, which is upheld by its robust PoW consensus mechanism. 

Possibilities for Monero’s Future

Monero still isn’t a decade old, and akin to most technological frameworks in their early-mid stages of development, it faces certain challenges. Although the project has considerably resisted ASIC-based mining, its “Mining Pools” are often seen as centralized points of the network. 

Between themselves, some of the larger pools control over 40% of the network’s computational power. Moreover, in the absence of a desirable number of Monero-compatible wallets, users often face difficulties in securely storing their assets. Notwithstanding the importance of these aspects, one must realize that the eventual expansion  of the network’s activities will automatically obliterate the existing concerns. As more miners will join the network, the apparent centralization of mining procedures will be diluted. On the other hand, innovating secondary solutions and applications for the Monero network will mitigate the usability shortcomings. 

In a world where censorship, espionage, and privacy breaches are emerging as persistent socio-political menaces, a platform like Monero is almost destined to take the center stage. Indeed, certain diversifications with regard to functionality might be necessary, but Monero’s core vision itself is tailor-made for the present times. In terms of being a truly privacy-prioritized platform, Monero is among a distinguished class of crypto-assets. To say that a more user-oriented, meritocratic, and autonomous future shines at the other end of Monero’s tunnel might not be an overstatement. The reality, however, can only be verified when it arrives, for in the world of crypto, it’s never advisable to trust.  

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Mohammad Musharraf

Mohammad Musharraf

Mohammad Musharraf is a freelance blockchain and cryptocurrency copywriter. He started his journey in the industry in 2018 and has since written for several renowned crypto businesses and publications. Ultimately, Musharraf aims to travel the world and later own a house that offers a panoramic view of the mountains.

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