What is Monero (XMR)?

Monero is a so-called privacy coin, a cryptocurrency that makes it very difficult for other people to trace transactions. Privacy advocates maintain that financial transactions are none of anyone’s business. Critics claim that it facilitates money laundering and even terrorist financing. As with most things, there are merits to each side’s position.

Like others cryptocurrencies, Monero, also known as XMR, trades primarily on cryptocurrency exchanges. Since it isn’t backed by anything (aside from the thrust of its community), its value can be volatile. As of this writing, in late September, it is the 35th largest cryptocurrency, with a market cap of $4.48 billion.

Its privacy features have led some exchanges to suspend trading of the coin. While some crypto companies consider that profiting from Monero trading fees justifies any legal heat, others believe that it’s not worth the risk. In January 2021, Bittrex suspended trading of Monero, along with other privacy coins Zcash and Dash. South Korean and Australian exchanges delisted the coin after regulators piled on the pressure.

The biggest market for Monero is on the crypto exchange Binance. The Monero/USDT (USDT the ticker for Tether, a stablecoin) pairing is the most popular pairing, sucking up 11.42% of the market. The XMR/BTC (Bitcoin) on Binance pairing takes up another 5%.

How does Monero work?

Monero launched in 2014. It was created by seven developers, of whom five remain anonymous. Its whitepaper was called CryptoNote 2.0, since Monero is based on the CryptoNote protocol. Monero is Esparanto for “coin.” Originally, Monero was called Bitmonero, which means Bitcoin in Esperanto. The project changed its name following a fork.

Monero is a cryptocurrency, meaning that it runs on a decentralized blockchain ledger—essentially a public record of transactions. These transactions are processed by anonymous computers on the Monero network, who earn XMR for validating transfers of funds.

But while a lot of public blockchains, such as Bitcoin and Ethereum, let you view all of the transactions on the network, including which wallet sent what to whom, how much, and when, Monero uses cryptographic techniques to obscure a lot of this information.

Although you can view all transactions on Monero, the blockchain doesn’t let you see where the funds came from or to which wallet they were sent. You only know that, say, 0.85 Monero was sent between a wallet at precisely 18:36 on September 23, 2021, and was included in block 2455817. (A block is a batch of transactions uploaded on the blockchain).

To ensure privacy, Monero uses three different bits of technology. The first is “ring signatures”— a collection of cryptographic signatures that contains at least one signature from a real person, but with no way to tell which transaction in the group came from the real person. This is accomplished by using old transactions as decoys. As long as one real transaction is part of the collection, all appear valid. The second is “ringCT,” which hides the amount sent in a Monero transaction. The third is “stealth addresses,” which create one-time use addresses for each transaction.

Monero’s website says that these technologies make transactions “confidential and untraceable.” While this is good for privacy advocates, Europol’s former executive director, Rob Wainwright, tweeted in 2018 that Monero is "more challenging for law enforcement to counter” than Bitcoin.

However, Monero’s site doesn’t claim that its transactions are 100% anonymous. “If you wear a seatbelt, you can still die in a car crash,” it warns. On Bitcoin, Ethereum, and Monero, all wallets are pseudonymous—wallet addresses are a collection of numbers and letters that don’t identify their owner. But on Monero, so long as the technology works the transaction data doesn’t provide a whole lot of information about the user unless the owner has publicly disclosed their wallet address.

Monero shares some things in common with Bitcoin. For one, it uses computers to verify transactions. This is what is known as proof-of-work: a cryptographic method of verifying transactions using computational power.

Computational power is a way of quantifying something akin to effort; if you went to all the trouble of paying for the powerful computer parts and the hefty electricity bill, you’re probably a good egg and deserve to join the network of Monero miners. The fastest miners get XMR for their efforts.

Unlike Bitcoin, whose network is dominated by expensive purpose-built computers called ASIC miners, Monero uses an algorithm that is resistant to these types of computers. And with good reason: By design, Monero aims to decentralize the network by having as many different computers process transactions as possible.

That’s what distinguishes cryptocurrency networks from, say, VISA or Mastercard, which run proprietary payments networks and control the whole operation. Blockchains are designed to be difficult to shut down, but only a handful of people and organisations are realistically going to shell out thousands of dollars for ASIC miners, leading to a concentration of power in the network. By contrast, Monero lets miners use common consumer hardware, or “regular” computers, to compete fairly.

Lots of people have tried to crack Monero. The US Internal Revenue Service will pay hundreds of thousands of dollars to anyone who can crack the code. A company called CipherTrace claims that it has created a tool that lets it trace Monero transactions. CipherTrace’s claims are disputed by Monero’s community.

And the project is not without its bugs. In July 2021, developers disclosed that it’s possible to estimate “with good probability” which transactions in ring signatures are fake decoys if someone spends funds from Monero’s official wallet. “This does not reveal anything about addresses or transaction amounts. Funds are never at risk of being stolen,” said the developers.

How does Monero stack up against other privacy-preserving technologies?

Monero is not the only privacy coin. Other coins, notably ZCash and Dash, have privacy features. What distinguishes Monero is that all transactions are private. With ZCash and Dash, privacy is just an option. Monero, according to its website, is “private by mandate; there is no way to accidentally send a transparent transaction.”

Monero says that this makes things easier for merchants, which don’t have to blacklist certain addresses. However, some merchants might choose not to accept Monero due to the legal risk it poses—being caught facilitating money laundering is not a good look.

Monero is also distinct from other privacy-preserving financial technologies, like cryptocurrency mixers of zero-knowledge proofs.

Mixers, also known as tumblers, combine lots of cryptocurrency transactions into a private pool before distributing those funds out to the intended recipients. The point is that the mixer functions as a kind of “black box” that hides the destination of the fund. All you can tell is that person “A” sent funds to a mixer, as did a load of other people, and that person “B” received funds from a mixer. Although you know that people interacted with a mixer, you can’t work out to whom they sent their money.

Zero-knowledge proofs are pieces of cryptographic technology that let you sign things without disclosing information. For instance, you might be able to prove that you own $10,000 without having to disclose to someone else precisely how much money you have. This is useful in, say, a welfare program, where you might want to confirm that you have a disability but don’t want to say which one.

How to buy Monero

Buying Monero is just as easy as buying other cryptocurrencies. The only snag is that some exchanges do not list the coin, usually owing to concerns around money laundering or regulations. But for those that do list Monero, the process is standard.

First, sign up to an exchange that lists Monero. As of this writing, Binance, Huobi Global, Bitfinex, and Kraken are the most popular exchanges for Monero trading. Then, after completing any necessary identity verification procedures, load up your Monero wallet with a currency that pairs with Monero on the exchange. On Binance, the most popular pairings are USDT, BTC, BUSD, and Ethereum. On Huobi, it’s USDT and on Bitfinex it’s USD.

Then buy the coin using the exchange’s market page. Note that this will not make use of Monero’s privacy-preserving capabilities, since the exchange likely has your name and address and records all transactions. You can also buy Monero from Local Monero, a peer-to-peer marketplace for Monero.

It’s only after you’ve withdrawn Monero to a Monero wallet, then sent that Monero to another wallet, that Monero becomes private. There are several wallets; those recommended by Monero are listed here. For mobile users, Cake Wallet and Monerujo are “deemed safe by respected members of the community,” according to Monero’s site.

Monero is also supported by hardware wallets—USB sticks that aren’t connected to the internet. It’s supported by both of the two main contenders in the hardware wallet space, Ledger and Trezor. There’s also a computer app and a command-line interface, although the latter is best suited for more advanced users.