Chainalysis: Introduction to Monero, the Pioneer of Privacy, and Its Regulatory Status

Author: Chainalysis

Compiled by: GaryMa, 吴说区块链

In 2013, developer Nicholas van Saberhagen (likely a pseudonym) published the CryptoNote white paper, in which he stated, "Privacy and anonymity are the most important aspects of electronic cash." This article caught the attention of Bitcoin developers Gregory Maxwell and Andrew Poelstra, who subsequently published a paper exploring the implications of enhanced privacy and anonymity features on existing cryptocurrencies. Other developers used the ideas from CryptoNote to create Bytecoin, the first privacy coin. It was around this time that the first iteration of Monero emerged.

"Thankfulfortoday" is an anonymous user on the Bitcointalk forum who created a branch called BitMonero based on Bitcoin's code. Some users disagreed with this direction and eventually created another branch in the blockchain called Monero. Nearly a decade later, Monero (XMR) has become the highest market cap privacy coin and has sparked important discussions about the role of privacy and traceability in the blockchain ecosystem.

In this article, we will explore:

● Monero's enhanced privacy features

● Practical applications of Monero

● Market growth of Monero

● Monero's mining rewards

● Dark web market activities

● Monero bans and regulations

● The future of Monero

What is Monero (XMR)?

Monero, also known as XMR, is a cryptocurrency that encodes privacy-enhancing features into its protocol. Most popular cryptocurrencies, such as Bitcoin and Ethereum, operate on transparent, immutable ledgers that allow anyone to view and track transactions. Monero is also an open-source blockchain, but its features are designed to reduce traceability and protect user anonymity.

Monero's Privacy-Enhancing Features

The primary goal of Monero is to provide a decentralized network that enhances transaction privacy and anonymity. As Justin Ehrenhofer, an organizer of the Monero Space working group, explained, "We want to provide privacy, just to plug some of the fundamental holes that exist in most cryptocurrency protocols… Therefore, Monero is indeed the only currency that hides the sender, receiver, and amount."

The Monero blockchain employs various privacy-centric methods to obscure users' transaction histories:

● Ring signatures connect multiple users in a "ring" to hide their individual identities, making it more difficult to determine which user generated a given signature.

● In 2017, Ring Confidential Transactions (RingCT) were added to Monero, hiding transaction amounts.

● By using stealth addresses, all Monero senders automatically generate a new address each time they initiate a new transaction, obscuring the source and destination of funds. Stealth addresses are cryptographically linked to the actual public address receiving the payment, but only the sender and receiver know the association between the two. The parties have a private view key (to display incoming transactions) and a private spend key (to send payments).

● Transactions can be initiated through Tor/I2P, which utilizes anonymous networks to protect the privacy of transaction sources. This feature has only recently begun and is still considered experimental.

● Dandelion++ hides the IP addresses associated with nodes to reduce the risk of exposing address identities using sensitive information.

How Monero Works

The features that enhance anonymity in Monero have led to the perception that it is often used for illegal purposes such as money laundering. While these activities do occur, Monero is also used for many legitimate purposes. Analyzing the market growth, mining rewards, and dark web market activities of Monero helps us gain a more comprehensive understanding of how it is used—both for good and for bad.

Market Growth of Monero

In recent years, Monero has experienced significant growth, with a market cap nearing $2.8 billion as of May 2023. This is significantly higher than the market caps of other popular privacy coins and privacy-focused cryptocurrencies like Zcash and Dash, which are approximately $600 million and $550 million, respectively.

Since Monero's inception in 2014, there have been about 32 million XMR transactions. In 2022, there were approximately 8.6 million XMR transactions, slightly down from the peak of 8.8 million in 2021. In contrast, there were nearly 800 million Bitcoin transactions during the same period.

XMR activity doubled between 2019 and 2020 and experienced similar growth from 2020 to 2021. As shown in the figure below, there have been an average of about 24,000 transactions per day over the past two years.

Monero's Mining Rewards

Similar to the Bitcoin blockchain, Monero uses a proof-of-work consensus mechanism. Its PoW algorithm, RandomX, is designed to maintain decentralized mining and resist specialized hardware (such as ASICs). The issuance of XMR is unlimited to ensure ongoing mining incentives, with a new block generated approximately every two minutes. Miners can choose to mine solo or in a pool, although the Monero project encourages solo mining as it helps improve network security.

From March 2020 to January 2023, Chainalysis identified a representative sample of Monero mining reward recipients. In our sample, three major mining pools mined over 80% of XMR.

● SupportXMR.com

● Crypto-Pool.fr

● Nanopool.org

Dark Web Market Activities

In recent years, many dark web markets have adopted Monero to reduce traceability. For example, one of the most active dark web markets before its closure, the White House Market, encouraged its users to switch from Bitcoin to Monero for transactions and eventually transitioned to only accepting Monero. Other dark web markets, such as AlphaBay and prototype, have also adopted similar patterns. However, Bitcoin remains the most commonly used digital currency on dark web markets.

Monero Bans and Regulations

Given Monero's growth and popularity, it is often the focal point of discussions about bans and regulations on privacy coins. Major economies such as Japan and South Korea have banned Monero from exchanges to curb money laundering and reduce organized crime. In 2020, reports indicated that Australian regulators and banks encouraged cryptocurrency exchanges to delist XMR or face the risk of "disconnection from banking services." Dubai is one of the latest countries to follow suit, banning the use of Monero under its new digital asset regulatory framework.

For similar reasons, many cryptocurrency exchanges have also taken action to terminate support for Monero. Bittrex, BitBay, and Huobi are three such exchanges. Similarly, the U.S.-based cryptocurrency exchange Kraken delisted Monero for its UK customers in 2021 to comply with the country's developing regulations.

The Future of Monero

Despite many criminals using Monero to obscure transactions, they have not adopted Monero as widely as expected. The primary reason is that Monero has lower liquidity compared to other cryptocurrencies, making it more difficult to execute large trades. Regulatory uncertainty and XMR bans have also reduced its accessibility in certain countries.

As Monero's developers continue to innovate and ecosystem participants explore its use cases, these will be important considerations. Regardless, all cryptocurrencies—including privacy coins—operate on immutable blockchain ledgers, meaning that evidence of transactions will always exist, whether legal or illegal.