The Problem with Bitcoin (and Other Cryptocurrencies)
Monero is one of the leaders of a privacy movement in cryptocurrency. This movement is concerned with guaranteeing that you can use cryptocurrency however you want, without fear of having your transaction history tracked or exposed. Privacy isn’t trivial. Even for law-abiding citizens, there are many reasons you might want to keep certain personal or business purchases and payments private.
Here are some examples from Monero’s website of why ordinary citizens should value privacy:
- You are travelling through parts of a country with a medium to high violent crime rate. You need to use some of your Bitcoin to pay for something. If every person you transact with knows exactly how much money you have, this is a threat to your personal physical safety.
- You are a business that receives a payment from a supplier. That supplier will be able to see how much money your business has, and therefore can guess at how price sensitive you are in future negotiations.
- You are a private citizen paying for online goods and services. It is common practice for companies to attempt to use ‘price discrimination’ algorithms to attempt to determine the highest prices they can offer future services to you at, and you would prefer they do not have the information advantage of knowing how much you spend and where you spend it.
This privacy movement, and Monero itself, came as a reaction to Bitcoin’s problems with transaction tracking. On the Bitcoin blockchain, you can see the sender’s address, recipient’s address, and amount for every transaction on the publicly-available blockchain. While the addresses are anonymous, with a little bit of work you can follow transactions to understand which addresses are sending money to where. The web of transactions eventually allows anyone in the world to see who is purchasing what with a little detective work.
In response to these privacy and traceability concerns in Bitcoin, Nicolas van Saberhagen developed the CryptoNote protocol for handling public addresses on the blockchain in a more opaque way, protecting users from traceability. The first cryptocurrency to implement the new protocol was Bytecoin in 2012. Over time, Bytecoin’s code became well optimized, and by 2014 it started to gain traction as a privacy currency. However, since it was originally developed as an academic experimental coin, by that time nearly 80% of its total coin supply has already been mined, making it problematic for wide adoption and scalability.
Monero is a hard fork of the original Bytecoin, started in 2014, that fixed the coin supply issues and other problems with Bytecoin. It uses the CryptoNote protocol in the form of CryptoNight proof of work hashing function to make it hard for mining by specialized computers. Instead, CryptoNight is optimal for ordinary CPUs to power the proof of work , leading to a more egalitarian and distributed mining community on Monero.
Monero guarantees anonymity and untraceability through a series of three technologies: ring signatures, stealth addresses, and ring confidential transactions.