Monero was designed to be decentralized, peer-to-peer, untraceable digital cash. It uses a proof of work consensus algorithm and has two unique features. Untraceability and unlinkability. Unlinkability means transactions cannot be linked to public addresses on the Monero network. Untraceability means no one can tell where any transaction originated from or ended up.
On the Monero network, the origin of a transaction is hidden by what’s called a ring signature. The destination of the transaction is obscured by the network creating a one time stealth address that can only be seen by the sender and the receiver by a secret view key only available to both parties. Additionally, the network does not disclose the amount sent, allow double spending (via ring confidential transactions (Ring CT)) or disclose the IP address of the origin or destination of the transaction (via an I2P router called Kovri).
- Ring signatures
- On the Monero network, records of transactions do not include merely one transaction. Instead, they are made of several previous transactions as well as the current one. This makes it nearly impossible to determine which transaction is being recorded based on the record on the blockchain. Only the users with the keys are aware of which transaction of the ones included in the record is the real one.
- Ring CT
- Ring CTs allow the network to be double spending proof. The combination of the ring of transactions are given a signature by the network. The signature is generated by information unique to each transaction. If the signature is the same as a previous transaction, the network doesn’t allow it. This prevent double spending.
- Additionally, the network obscures the amount sent via a formula called the “Pedersen commitment”. The “Pedersen commitment” takes the actual amount spent and multiplies it by a random number.
- Transactions are routed through all a bunch of different nodes on the network. This is similar to how the Tor network functions.
Monero is the best network resistant to blockchain analysis. Monero’s previous opt-out system is at least one flaw that makes some transactions at least partially traceable. The system allowed users to opt out of its privacy protections. By doing this, previous transactions that would have been obscured by being part of a ring signature could be be confirmed to have happened at a definitive point in time. This allows parties to assume the signatures of such a transaction when included in a ring are actually decoys instead of the real transaction. Since this feature no longer exists, this is no longer a significant problem on the network.