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@ hoppe
2025-04-30 11:16:42Let us delve into Monero (XMR). Among the proponents of various altcoins, Monero arguably commands one of the most dedicated followings, perhaps second only to Ethereum. Unlike many altcoins where even investors often harbor speculative, short-term intentions, the genuine belief within the Monero community suggests an inherent appeal to the chain itself.
The primary advantage touted by Monero (and similar so-called "privacy coins") is its robust privacy protection features. The demand for anonymous payment systems, tracing its lineage back to David Chaum, predates even the inception of Bitcoin. Monero's most heavily promoted strength, relative to Bitcoin, is that its privacy features are enabled by default.
This relates to the concept of the "anonymity set." To guarantee anonymity, a user must blend into a crowd of ordinary users. The larger the group one hides within, the more difficult it becomes for an external observer to identify any specific individual. From the perspective of Monero advocates, Bitcoin's default transaction model is overly transparent, clearly revealing the flow of funds between addresses. While repeated mixing can enhance anonymity in Bitcoin, the fact that users must actively undertake such measures presents a significant hurdle. More critically, proponents argue, the very group engaging in such deliberate obfuscation is precisely the group one doesn't want to be associated with for effective anonymity. Hiding requires blending with the ordinary, not merely mixing with others who are also actively trying to hide — the latter, they contend, is akin to criminals mixing only with other criminals.
This is a valid point. For instance, there's a substantial difference between a messenger app offering end-to-end encryption for all communications by default, versus one requiring users to explicitly create a "secret chat" for encryption. While I personally believe that increased self-custody of Bitcoin in personal wallets, acquisition through direct peer-to-peer payments rather than exchange purchases, and the widespread adoption of the Lightning Network would make tracing significantly harder even without explicit mixing efforts, let us concede, for the sake of argument, that Bitcoin's base-layer anonymity might not drastically improve even in such a future scenario.
Nevertheless, Monero's long-term prospects appear considerably constrained when focusing purely on technical limitations, setting aside economic factors or incentive models for now. While discussions on economics can often be countered with "That's just your speculation," technical constraints present more objective facts and leave less room for dispute.
Monero's most fundamental problem is its lack of scalability. To briefly explain how Monero obfuscates the sender: it includes other addresses alongside the true sender's address in the 'from' field and attaches what appears to be valid signatures for all of them. With a default setting of 10 decoys (plus the real spender, making a ring size of 11), the signature size naturally becomes substantially larger than Bitcoin's. Since an observer cannot determine which of the 11 is the true sender, and these decoys are arbitrary outputs selected from the blockchain belonging to other users, anonymity is indeed enhanced. While the sender cannot generate individually valid signatures for the decoy outputs (as they don't own the private keys), the use of a ring signature mathematically proves that one member of the ring authorized the transaction, allowing it to pass network validation.
The critical issue is that this results in transaction sizes several times larger than Bitcoin's. Bitcoin already faces criticism for being relatively expensive and slow. Monero's structure imposes a burden that is multiples greater. One might question the relationship between transaction data size and transaction fees/speed. However, the perceived slowness of blockchains isn't typically due to inefficient code, but rather the strict limitations imposed on block size (or equivalent throughput constraints) to maintain decentralization. Therefore, larger transaction sizes directly translate into throughput limitations and upward pressure on fees. If someone claims Monero fees are currently lower than Bitcoin's, that is merely a consequence of its significantly lower usage. Should Monero's transaction volume reach even a fraction of Bitcoin's, its current architecture would struggle severely under the load.
To address this, Monero implemented a dynamic block size limit instead of a hardcoded one. However, this is not a comprehensive solution. If the block size increases proportionally with usage, a future where Monero achieves widespread adoption as currency — implying usage potentially hundreds, thousands, or even hundreds of thousands of times greater than today — would render the blockchain size extremely difficult to manage for ordinary node operators. Global internet traffic might be consumed by Monero transactions, or at the very least, the bandwidth and storage costs could exceed what individuals can reasonably bear.
Blockchains, by their nature, must maintain a size manageable enough for individuals to run full nodes, necessitating strict block size limits (or equivalent constraints in blockless designs). This fundamental requirement is the root cause of limited transaction speed and rising fees. Consequently, the standard approach to blockchain scaling involves Layer 2 solutions like the Lightning Network. The problem is, implementing such solutions on Monero is extremely challenging.
Layer 2 solutions, while varying in specific implementation details across different blockchains, generally rely heavily on the transparency of on-chain transactions. They typically involve sophisticated smart contracts built upon the ability to publicly verify on-chain states and events. Monero's inherent opacity, hiding crucial details of on-chain transactions, makes it exceptionally difficult for two mutually untrusting parties to reach the necessary consensus and cryptographic agreements (like establishing payment channels with verifiable state transitions and dispute mechanisms) that underpin such Layer 2 systems. The fact that Monero, despite existing for several years, still lacks a functional, widely adopted Layer 2 implementation suggests that this remains an unsolved and technically formidable challenge. While theoretical proposals exist, their real-world feasibility remains uncertain and would likely require significant breakthroughs in cryptographic protocol design.
Furthermore, Monero faces another severe scaling challenge related to its core privacy mechanism. As mentioned, decoy outputs are used to obscure the true sender. An astute observer might wonder: If a third party cannot distinguish the real spender, could the real spender potentially double-spend their funds later? Or could someone's funds become unusable simply because they were chosen as a decoy in another transaction? Naturally, Monero's developers anticipated this. The solution employed involves key images.
When an output is genuinely spent within a ring signature, a unique cryptographic identifier called a "key image" is derived from the real output and the spender's private key. This derivation is one-way (the key image cannot be used to reveal the original output or key). This key image is recorded on the blockchain. When validating a new transaction, the network checks if the submitted key image has already appeared in the history. If it exists, the transaction is rejected as a double-spend attempt. The crucial implication is that this set of used key images can never be pruned. Deleting historical key images would directly enable double-spending.
Therefore, Monero's state size — the data that full nodes must retain and check against — grows linearly and perpetually with the total number of transactions ever processed on the network.
Summary In summary, Monero faces critical technical hurdles:
Significantly Larger Transaction Sizes: The use of ring signatures for anonymity results in transaction data sizes several times larger than typical cryptocurrencies like Bitcoin.
Inherent Scalability Limitations: The large transaction size, combined with the necessity of strict block throughput limits to preserve decentralization, creates severe scalability bottlenecks regarding transaction speed and cost under significant load. Dynamic block sizes, while helpful in the short term, do not constitute a viable long-term solution for broad decentralization.
Layer 2 Implementation Difficulty: Monero's fundamental opacity makes implementing established Layer 2 scaling solutions (like payment channels) extremely difficult with current approaches. The absence of a widely adopted solution to date indicates that this remains a major unresolved challenge.
Unprunable, Linearly Growing State: The key image mechanism required to prevent double-spending mandates the perpetual storage of data proportional to the entire transaction history, unlike Bitcoin where nodes can prune historical blocks and primarily need to maintain the current UTXO set (whose size depends on usage patterns, not total history).
These technical constraints raise legitimate concerns about Monero's ability to scale effectively and achieve widespread adoption in the long term. While ongoing research may alleviate some of these issues, at present they represent formidable challenges that any privacy-focused cryptocurrency must contend with.