Ring signatures and fungibility of Monero
Monero has made untraceability and unlinkability of transactions possible by implementing several cryptography principles and ideas that other cryptocurrencies didn’t. It has also made mining possible for the average user and not just miners with specialized hardware.
A digital ring signature is a way to verify data by a member of a group. This is the type of signature that Monero uses on its network. Each member in the group has a set of keys that allows performing the verification.
The concept of a digital ring signature is similar, but different from the concept of a group signature. A group signature is a way for a member of the group to sign data on behalf of the group.
There are two main differences between ring signatures and group signatures. First, with ring signatures is it not possible to tell which member of the group performed the verification. The feature of the group signature that allows for verification is called traceability. Secondly, any group of users on the network can create a ring signature without a need for additional setup.
Here’s how ring signatures work. Each member of the group has two keys: a public key P and a secret key S. Let’s say there are 4 members of the group. This means that there are 4 public keys and 4 secret keys: (P1, S1), (P2, S2), (P3, S3), (P4, S4). Using public keys P1, P2, P3, P4, user #5 can create a ring signature on a message M by using his or her secret key S5 and 4 public keys of the users of the group, i.e. using the set of data that consists of (M, S5, P1, P2, P3, P4). Anyone would be able to verify the signature, but it would not be possible to recreate the private keys or create a signature without having a private key.
True fungibility of Monero currency
Ring signatures, unlinkable stealth addresses, and separated units mean that identifying Monero users and details about transactions on the network is virtually impossible. This is what makes the Monero currency truly fungible. In economics, fungibility is a property of a class of assets that means that individual asset items are interchangeable. Fungibility is one of the most important properties of any widespread currency. With Monero, the history of the coins is hidden and each coin has the same value.
Fungibility may become an issue with assets that have trackable history. Here’s why fungibility is so important for currencies: if you know that a certain currency bill in the past has been used to trade illegal goods, you may choose to not accept the bill. This means that while the currency is the same, for example, United States dollar, some individual bills may have higher value compared to other bills of the same currency.
Fungibility can be a major concern when using digital currencies and payment systems. For example, Paypal may choose to freeze an account is the company suspects that there may be an issue with the source of payments that are coming into the account. Centralized bitcoin payment processors such as Coinbase may choose to not work with accounts that receive funds from gambling-related websites and projects. The currency of exchange may be Bitcoin, but a provider can trace funds using the blockchain of the currency and then make decisions about the current owners of the funds based on that activity. With Monero, this is not possible. This is one of the reasons behind the popularity of Monero.
However, everything in life has its price. The anonymity of Monero currency leads to Monero software having a lot of computing and data requirements. As the demand for Monero keeps going up, the block size of the Monero network is also going up. For these reasons, Monero software is likely to use more computing power and system resources then Bitcoin and other cryptocurrencies.