The world was forever changed in 2009 when the elusive Satoshi Nakamoto created Bitcoin. The digital currency world has over the decade, completely changed the financial ecosystem. Bitcoin and subsequent cryptocurrencies have a lot of benefits over using traditional money. Speed, efficiency and economics being the major factors. However, there has always been something lacking.
Good as they are, one of the basic features of cryptocurrencies is there transparency. Each and all transactions are ever done on the network are available on the ledger. This is an important factor of functionality. As a decentralized technology, each node that maintains the ledger should have a complete copy of the transactions. For people who want to have anonymity and privacy, this can be a bit problematic. Even though the long strings of alphanumeric characters that make up a wallet address are not tied down to a person or an institution by name, it is still possible to trace out the user through different methods, such as IP tracing or even connecting transactions from and to addresses.
Bitcoin, Dogecoin, Litecoin, Ethereum and many other cryptocurrencies are not anonymous. Instead, they are pseudonymous.
Transaction Privacy: Monero
The Bitcointalk forum user thankful_for_today created a fork of the Bytecoin blockchaain in 2014. He named the new chain BitMonero. The name was an amalgam of two words, Bit from Bitcoin and Monero from Esperanto (literally meaning coin).
The fork was largely criticized by the community as it offered nothing in improvement compared to its parent chain. The block time, mining reward and other essential items had been ignored. The creator thankful_for_today left and the project was taken up by other developers, most notably Johnny Mnemonic.
The new team instantly began working on the improvements and dropped the Bit in the name, creating one of the most successful privacy cryptocurrency. Today, Monero is counted amongst the largest cryptocurrencies in the world. Leveraging the advantages of blockchain, but employing cryptographic methods to obfuscate the source of funds, the amount sent and the receiver, it makes it impossible for anyone to trace the tokens’ origins and destination.
Rings and Stealth
Monero achieves its privacy feature using two different concepts together. These concepts help to ensure that no one gets to know who sent the transaction and who is at the other end.
The Ring Signature concept is basically a group of randomly selected public keys when a transaction is to be made. Whenever a transaction is to be executed, the original sender’s key is mixed with the other random keys. This way, anyone looking at the addresses would not tell which address initiated the transaction. Yes, a viewer would certainly know from which temporarily created group the transaction came from, but he or she would never be able to connect the transaction to any of the randomly selected (and original) public address.
The transacted amount is also mixed within the group, so observers cannot even pin the amount to a specific address. Initially, Monero only allowed exact amount of transactions to create this obscurity, but today, the Ring Confidential Transaction protocol doesn’t require same amount transactions to be mixed together. This creates a secondary privacy layer.
Even if a sender’s identity is hidden this way, including the amount of XMR being sent, it is still possible to view the recipient. Though one can argue that this shouldn’t matter much as the receiver address is still a string of characters without any identification tying it to someone, this can be an issue if the address is used for transacting in real life, such as buying online, where the website user details such as name and address are linked with their Monero wallet address. To counter this problem, Monero creates a onetime wallet address to receive the transacted amount, called a Stealth Address. This is much like a disposable address. The complex cryptography calculations allow XMR to be sent to the original address, but in records, it is sent to the stealth address. Searching the stealth address, the only visible part of the whole transaction, would show only an empty wallet address that has no transactions done in it. A new stealth address is created every time a transaction is done.
The privacy of Monero transactions is set by default and cannot be turned off. This creates issues in verifying transactions though. If the transactions are not tied down to the original addresses, how can one verify that XMR has been sent or received in their own wallet? This is where Private View and Private Send Keys come in.
Private View Key allows the wallet owner to view transactions made to and from the address. This is true, view only key and the wallet owner can give it to anyone for verification purposes. The Private Spend Key is what it sounds like, a private key to give complete access to the wallet and spend the XMR tokens.
My Take on Monero
Though there are a lot of privacy coins in the crypto space, Monero sets itself apart with its ability to completely obscure transactions. Unlike other coins, where developers discuss and deliberate on forks and upgrades to protocols to ensure stability to the blockchain ecosystem, Monero developers are quick on their feet, ensuring that the blockchain is always ahead of attempts to break its encryption and privacy.
The developers are committed to the privacy nature, and that has helped Monero stay ahead of its competition.
Check more articles from this series:
NFTs History — From Rare Pepe to Beeple 69 Million Dollar NFT sale
Defining DeFi: What Is Decentralized Finance?
Afraid of buying Bitcoin? Get this ETF
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Disclosure: views expressed are purely personal and do not reflect any organisation’s views or thoughts the writer of this book may be affiliated or associated with.
Rings, Stealth and Monero awesomeness was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.