Monero is a cryptocurrency which uses a public ledger to record transactions while new units are created through a process called mining. Monero aims to improve on existing cryptocurrency design by obscuring sender, recipient and amount of every transaction made as well as making the mining process more egalitarian.
Despite flying under the radar for a large section of the masses in the crypto community, Monero boasts of a cult following amongst those aware of it. Many have even gone on to call it the ‘true Bitcoin’. All this is because of its significant focus on privacy, which is what many expected originally from Bitcoin. Let’s better understand why Monero is the dark horse of the cryptocurrency world.
To truly understand why Monero is succeeding, we need to understand Bitcoin in more detail. When Bitcoin originally launched with Satoshi’s white paper, many hailed it as a harbinger of privacy and anonymity, one that would give complete control to people over their own money. With a decentralised blockchain and unique wallet addresses, you could send money to anyone without getting identified.
All this was great, but only until governments stepped in and began trying to regulate the industry. Exchanges mandated KYC (Know-Your-Customer) norms when onboard users, and for many, their wallet addresses were now tied to their identity. In fact, sending from your exchange wallet to your personal wallet, also tied it to your personal identity. Why? Because while the blockchain brought with itself complete transparency as well. Remember – the blockchain is a public ledger, viewable by anyone. This means every single transaction on the blockchain is public. There’s no hiding from public scrutiny. Everyone can even see your wallet balance.
While solving the double spending problem via the blockchain was Bitcoin’s biggest innovation, the sort of public attention the blockchain brought to its users wasn’t very comforting to a large section of the privacy-focused users. This wasn’t what they wanted cryptocurrencies to be doing. There had to be a way to introduce privacy to the blockchain. But the blockchain was a public ledger, right? How would these two needs converge?
Additionally, Bitcoin brought with itself another problem that raised questions on its viability as a currency. In our first lesson on cryptocurrencies here, we discussed the basic characteristics every currency should have:
- Value stability: 100 units in your currency should be able to buy you the same quantities of items today and tomorrow. If there’s too much fluctuation (inflation or deflation), we have a problem.
- Durability: Your money should last long. It cannot exist for a single (or few) transaction(s).
- Portability: If we were still using only gold coins instead of paper money, imagine the truckloads the rich folks would have to carry to make a large payment. Money needs to be portable and easily transported – like the notes and plastic cards we use now.
- Fungibility: The units of money should be able to be substituted by other units – that is, all money in your currency should be equal. 500 units of your money in your currency should hold the same value as 500 units of your neighbour’s money in the same currency.
- Cognizability: the value of your money should be easily identifiable.
Bitcoin was failing the fungibility test. With analysts able to track every transaction on the blockchain, it was fairly easy to identify bitcoins that came from things like an exchange hack, or bitcoins that touched illegal websites. These coins would then be rejected by services. Bitcoin was no longer fungible i.e not every unit of bitcoin was considered equal to another.
This was a problem.
In April 2014, Monero was introduced. Originally launched as ‘BitMonero’ by a user ‘thankful_for_today’ on a BitcoinTalk forum, the name was changed to Monero within 5 days.
Right from the start, the development team ensured that Monero would be fairly different from the numerous other Bitcoin spinoffs the cryptocurrency world had been seeing.
- For starters, it was based on the CryptoNight algorithm, unlike the SHA-256 algorithm Bitcoin is based on. This came from the CryptoNote protocol. Using a very different proof of work protocol, which we shall discuss in a bit, the CryptoNight algorithm allowed transactions on the blockchain to be ‘mixed’ with each other, making it exponentially difficult to trace where they originated from.
- The CryptoNight algorithm was also ASIC (Application Specific Integrated Circuit) resistant, unlike Bitcoin. This meant people could not set up large mining machines to mint Monero. Instead, it would have to be mined via Central Processing Units (CPUs) or Graphical Processing Units (GPUs). To many, this was a more egalitarian version of cryptocurrencies.
Monero began to peak in popularity in 2016.
In 2017, it got another shot in the arm when Bitcoin developer Gregory Maxwell’s algorithm – Confidential Tranasctions – found itself implemented in Monero. This meant that the amount value in transactions could also be hidden.
The coin continues to have a bright future ahead of itself. With the recent wave in privacy concerns taking over the globe, expect a larger number of people to flock to Monero. It also helps that the development team has been consistently praised for its commitment to delivering updates – a rarity in most cryptocurrency teams, except for perhaps Ethereum.
Monero derives its value in the cryptocurrency market largely from its privacy centric features. Bitcoin did not rise to the need for a truly private currency, which is why Monero stepped in to fill the void.
According to CoinMarketCap, Monero was trading for about $1.41 in May of 2014, the earliest known price history we have for the coin. This price dipped to a staggering low of $0.4 over the next year, presumably due to the crypto winter the entire industry witnessed.
While largely staying under the radar for a long period of time, the coin witnessed its first meteoric price rise in September of 2016, when it appreciated 6 times in value to end up at $12. It ended up being the fastest growing cryptocurrency in 2016. This was primarily because the world was now waking up to the significance of privacy amidst all the CIA scandals and leaks. Darknet markets were increasingly adopting Monero over Bitcoin, with darknet markerplace Alphabay being the first to support payments via Monero on its platform.
Going forward, expect Monero’s price to depend on the following factors:
- The Market Need For Privacy: Monero should exist, and thrive as long there are enough people requiring privacy in their transactions. It seems like a given that such a market need will always exist. Many Monero fans often joke around, that if we were living a cryptocurrency dominated future – would you really like your pizza delivery guy to know what your account balance is? That’s the need Monero is trying to serve.
- The likelihood of other coins offering privacy: Zcash offers ‘zs-snarks’ based protocol for private transactions. Ethereum is said to be researching bringing in private transactions to its blockchain. Bitcoin enthusiasts say the introduction of sidechains would also bring anonymity. Until any of these factors become a challenge to Monero, it should be fine, and its price should continue the meteoric rise it has seen.
- The effectiveness of its protocol: Monero’s mixin protocol, that helps hide transaction data, was found to be ineffective a few years ago, allowing analysts to trace transaction data to wallets with a certainty of 90%. This was a big blow, but future updates and changes in the protocol fixed these issues and brought down tracebility to well below 10%. The development team is active, and continues to push out updates to the protocl with a frequency barely matched by any other cryptocurrency. Expect this to boost its price.
- Regulations: If governments across the world begin to crack down on cryptocurrencies, it is possible that Monero may be the first scapegoat, since it is the hardest to trace, and toughest to crack. Governments don’t like tax revenues lost, so they may come after Monero first. Some do argue that in such cases, this would only push Monero underground and increase its value. But who’s to know?
There’s a section of cryptocurrency enthusiasts who see Monero eventually replacing Bitcoin. In such a case, if were to assume Monero’s Market cap would match Bitcoin’s, expect the price to surge well above $1000, or even $5000. Regardless of the exact value, it may be safe to assume that we’re in for interesting results on Monero’s future. Are you buying?