Developers and industry participants have produced a multitude of digital currencies since Bitcoin became the first digital currency to scale, meaning that it attained widespread adoption. These innovative currencies have been created to fulfill a wide range of objectives, ranging from creating a global payment system to serving as the "gas" needed to fuel a platform from decentralized apps (DApps).
Monero, one of the more prominent digital currencies, has generated significant visibility through its innovative technology and widespread adoption. Through its ability to help users hide their transactions, Monero has managed to arguably become the most dominant (widely used) privacy-oriented digital currency.
What is Monero (XMR)?
Monero is a privacy-focused cryptocurrency that interested parties, including senders and receivers, can use to shield their identities, as well as the amount they are sending through transactions.
It launched in 2014, and the people involved did not hold an instamine or premine. In other words, they didn't set aside any units of the digital currency for themselves. Monero has undergone several upgrades since that time, which, among other things, ensured that all transactions are private by default.
Since no one knows the transaction history of a particular unit of monero, the digital currency has true fungibility. If something is fungible, that simply means that one unit of that something, whether it's a unit of currency or an asset, can be exchanged with another. A dollar bill, assuming it has not been counterfeited, would be fungible, since you can easily exchange it for another dollar bill.
Privacy Is Paramount
The digital currency harnesses several key technologies to ensure a high level of privacy.
Monero uses something called stealth addresses, which obligate a party sending the cryptocurrency to establish a one-time address for the recipient. Receivers make one address public, but every time they receive a unit of monero, a unique stealth address must be created. The practical result of this situation is that every time a transaction takes place, it is impossible for any observers to connect that transaction to a sender or a recipient.
The digital currency also leverages something called ring signatures, which help conceal the privacy of senders. Ring signatures leverage account keys, which are unique to an individual, and combine them with public keys obtained from Monero's blockchain to produce a "ring" of signers who could authorise a transaction.
Once a transaction is authorised using this method, it is "computationally infeasible" to determine which of the keys was used to sign that transaction. If a person makes a transaction using Monero, it would be quite difficult for an outside observer to determine which of the possible signers authorised a transaction.
Monero also uses something called Ring CT, which conceals the amounts sent and received through transactions. Ring CT stands for Ring Confidential Transactions, and it was implemented starting in January 2017. This upgrade provided an enhanced kind of ring signature called "A Multi-layered Linkable Spontaneous Anonymous Group signature."
What Is Bitcoin (BTC)?
Bitcoin was designed to be a peer-to-peer payment system. The Bitcoin white paper, "Bitcoin: A Peer-to-Peer Electronic Cash System," called for the creation of a system that would circumvent third parties, like financial institutions, by relying on cryptographic proof.
The white paper was released in 2008. The first units of the digital currency were mined in January 2009. In other words, the world's most prominent cryptocurrency came into existence during the Great Financial Crisis.
Since then, Bitcoin has generated widespread visibility. A perfect example is the investor interest it has drawn. As of April 2021, the digital currency had a total market value of roughly US$960 billion. This provides a measure of how much money investors are willing to put into this digital asset.
Bitcoin has also drawn the interest of regulatory bodies and government officials, resulting in some countries banning the cryptocurrency entirely. Other nations have taken a lighter approach. In the United States, for example, Jay Clayton, who served as chair of the U.S. Securities and Exchange Commission (SEC), stated that Bitcoin is not a security. In other words, the government agency lacked jurisdiction over the digital asset.
However, the Commodity Futures Trading Commission (CFTC) has also gotten involved, taking action against Coinflip, Inc., which was doing business under the name Derivabit, in 2015. Coinflip was operating a platform that offered the ability to trade put and call options based on Bitcoin, and the CFTC ordered it to cease and desist.
The government agency's ability to supervise digital assets was confirmed in September 2018 when a federal judge ruled that the CFTC has the ability to prosecute fraud related to "virtual currencies."
Transactions Aren't Anonymous
People who are interested in using Bitcoin should know that the digital currency's transactions are not anonymous. They are actually pseudonymous, since Bitcoin addresses, which serve as recipients of the digital currency, are strings of text.
Over time, several transactions can link to a Bitcoin address. Since all these transactions are publicly available on the blockchain, an observer could figure out which individual is associated with a Bitcoin address, and then they no longer be anonymous.
Monero Vs Bitcoin: Similarities
Both Monero and Bitcoin use cryptography.
Monero, for example, makes use of stealth addresses, and Ring CT, which have been described as "cryptographic advances."
Bitcoin uses something called Public Key Cryptography to make transactions, which involves using both public and private keys to verify transactions.
Monero and Bitcoin also both use the blockchain, the distributed ledger technology that essentially maintains a database of all transactions.
Another important similarity is that these two digital currencies have both made privacy an objective. As covered previously, the creator (or creators) of Bitcoin did not succeed in ensuring the Bitcoin Network had anonymous transactions.
The creators of Monero have been more effective in achieving this goal, helping ensure privacy through the use of stealth addresses, ring signatures and Ring CT.
Monero Vs Bitcoin: Differences
There are several key differences between the two cryptocurrencies.
Mining And Emission
Bitcoin was created to have a hard cap of roughly 21 million units. Therefore, unless the broader network executes a hard fork, miners will never be able to create more than the limit specified in the aforementioned hard cap.
Monero is different. The "emission," or creation, of new units of monero is designed to go on indefinitely. This feature was created to ensure that miners always have incentive to mine blocks.
To govern this continued creation and distribution of the privacy-oriented digital currency, the people behind Monero created two main emissions. One was designed to produce roughly 18.1 million coins by the end of 2022, and a second, which was created to release 0.6 units of monero every time a two-minute block was mined.
The second emission, known as Tail Emission, was created with the consideration that mining blocks needs to come with a certain profitability, and competition between miners will inevitably place downward pressure on fees over time.
Efforts To Ensure Privacy
Another major difference is that Bitcoin and Monero use completely different methods in an effort to provide users with privacy. As discussed earlier, Bitcoin transactions are pseudonymous. If outside entities want to analyse the network, they could potentially take transactions and connect the public addresses involved with a user's IP address.
Monero, on the other hand, uses completely different methods to help provide users with privacy, including stealth addresses and ring signatures.
Also, Bitcoin was created to serve as a peer-to-peer payment system, but Monero was designed to be a privacy coin. As a result, Monero was designed to have a certain level of rigor in order to protect its users effectively.
Monero and Bitcoin are both prominent digital currencies, in that they have achieved widespread visibility. While they certainly have their similarities, they have some major differences, too.
Even though they both leverage blockchain technology and make use of cryptography, they were created with rather different ends in mind. While Bitcoin was designed to provide users with a method of payment that could function outside of banks and the government, Monero was designed specifically to offer privacy and help protect the identities of users.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
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