I'm really new to Monero, so please feel free to correct me on any of this. This is a work in progress.
Monero- ELI5 BUT also have a basic understanding of Bitcoin.
Bitcoin did a lot of things right, but it forgot about privacy. Monero solves that problem.
Some easy things to get out of the way first, though. Here are some basic differences Monero has to Bitcoin that are easy to grasp:
Monero * Max. Coins: 18.4 M * All Ready-Mined Coins (%): ~22% * Block Time 1 Min 10 Min 2.5 M * Difficulty Re-Targeting: Every Block Every * Hashing Algorithm CryptoNight (ASIC resistant)
Bitcoin * Max. Coins: 21 M * All Ready-Mined Coins (%): ~64% * Block Time 10 Min * Difficulty Re-Targeting: 2016 * Hashing Algorithm SHA-256 (NOT ASIC resistant)
Darkcoin * Max. Coins: 22 M * All Ready-Mined Coins (%): ~21% * Block Time 2.5 M * Difficulty Re-Targeting: Every Block Every * Hashing Algorithm X11 (ASIC resistant)
Anonymity The interesting part of Monero is the way that it achieves anonymity. It also happens to be the most complex part. Monero utilized Cryptonote technology, which is an open-source tech that works to anonymize payments. There are two difficulties with making a block chain anonymous. It is a big ledger, remember. In the Bitcoin ledger, people can see how much money is in each address by checking where large spend amounts went and adding it up. Go check this website really quick, http://bitcoinrichlist.com/top100. That’s not good for privacy. Another problem is that all the transactions you make are traceable. In other words, you can trace the movement of money throughout the history of its life, right back to its inception, just by looking at who sent it where. Both the sending and receiving of coins needs to be made private. Mixing coins together isn’t enough because with enough analysis, governments, large corporations, and criminals will be able to deanonymize users over time. So how do we do it?
Where did the money come from?: Monero uses Ring signatures to stop people from being able to trace where the money has come from. In a normal Bitcoin transaction, you take your private key and a public key to sign a transaction. By signing the transaction, you are proving that you (used to) have control of the coins and are now passing them on to another person (or address). The problem with this is that everyone can see that you (or your address) spent X coins. Ring signatures are crypto invented in 2001 that allow you to use many different people’s public keys, as well as your own public key and your own private key. The resulting transaction will be shown as a single transaction, but people looking at it will not know whether it was you or the fourteen other people who sent the transaction. The more transactions that take place within the network, this one in fifteen chance of being able to identify an owner diminishes exponentially.
Imagine that each transaction is a magical pizza pie. There are eight slices of the pie. Each slice has a picture of someone on it, and it is one of those famous people who made the pie. You can guess which one it is, but unless you ask them personally, you'll never know. The pie looks amazing, but you soon come to realize that the pie isn't edible. It looks and smells delicious, but eating it just doesn't seem to do anything satisfactory, (just like eating money or gold). People, however, are dazzled by your pie, and keep asking for it. You finally get sick of your pie and give it away, but when you do, eight different faces appear on it, only one of them being your own. The new owner might know who the pie came from if you give it to her face to face, but if you just mail it to her, she will never know it was you because there are no cameras or google image search in this imaginary world, you silly goose.
Where did the money go? : You’ve just sent some Monero to your cousin Bob in Timbuktu and nobody knows it was you. Hooray! But where did you send the money? If your cousin Bob gives out his public address on his website, everyone will know what it is and can look for incoming transactions. To solve that, Monero turns the address it’s sending money to into a public key. Or rather, you do. You send money to a one-time public address calculated by Bob’s public key and some random data. Because of the random data you added to Bob’s address, no one can really tell who that money is going to. Bob, however, with very simple checking, can look over the current transactions and, using his private key, see that money was sent to him. When he sees the transaction you sent him, he just writes it down (not really, his computer will do that) and doesn't have to do anything else until he wants to spend those funds. When he does want to spend the money you sent him, he can use his private keys in conjunction with the the random data you used above to create a one-time private address. He then just signs his outgoing transaction with the private address to prove that the funds were really his and not just made up. In that way, every time you send money to Bob, it goes to a different address. Additionally, Bob (and you) knows he received money. Make sense?
A Side-Note
Bitcoin wallets are starting to use HD, or hierarchical deterministic wallets. That means that basically, you can easily create new addresses for each time someone sends you money or you need to give yourself some change while spending money. This way, you'll never re-use an address. If you have ring signatures all ready in place to hide where the money's coming from, why not just implement something where people can easily never re-use addresses? Well, because you've still got to give your address to people. With bitcoin, you've got to give someone a public address to send money to, and even if it is unique, anyone overhearing that communication will be able to know that money is moving to that address (and maybe you don't want people to know how much).
With this system, you don't have to worry about never re-using address. You are able to give everyone the same "address" (your public key), and it is the sender who takes care of making the address unique. This makes address books much easier to use. When you give your boss your bitcoin public address, your paycheck will accumulate in that address until you give her a different one. With Monero, you need only give her your "address" (public key) once and she will be able to create unique, one-time addresses for you every time she uses it, using a random number added (not exactly added of course) to your public key.
How do I prove I sent money to that dirty eBay vendor? He’s pretending that he never got the money!
Remember that random numbers are mixed in with public addresses to create the 'real' addresses that all this money's sent to? You can just wave that random number in the air. Only you and Bob can figure it out, but if you show everyone, they will then know that X money was sent to that dirty eBay vendor's public address.
Additionally, if Bob needs to prove that he’s a millionaire or wants someone else to take care of transaction processing for him, he can give out a portion, but not all of his private key. With this, a third party can check to see what transactions were sent to Bob, but cannot actually spend his money. Neat trick.
Drawbacks:
-Monero's supply distribution gives about 80% of the XMR (monero tokens) in 4 years. That's a lot to give to early adopters.
-Monero's block-chain size is about six times larger than the Bitcoin blockchain. Some say that will kill the coin, especially if it gets very popular. I think technology will probably save us on this aspect, but who knows.
It only gets more complicated, but if you want to learn more, check out the resources below. Here’s an ELI3 explanation of Darkcoin, because it much easier to understand, if I understand it correctly.
Darkcoin is another coin that addresses this issue, albeit in a different way. Darkcoin relies on the trust of so-called master-nodes. These master-nodes are basically private mixers of coins. The owner of a certain amount of coins must trust the master node that it has not been hacked or given away their private information.
**Resources: **
- Official Forums: https://forum.monero.cc/
- https://moneropool.com/ Total hash rate,
- https://cryptonote.org/
- http://coinwik.org/Monero
- http://bitmonero.org/
- Cryptonote Whitepaper (detailed break-down): https://cryptonote.org/whitepaper.pdf
- Monero Whitepaper Review: http://monero.cc/downloads/whitepaper_review.pdf
- https://forum.cryptonote.org/viewtopic.php?f=6&t=162
- More ELI5, Cryptonote: https://cryptonote.org/
- BTC ELI5: https://www.reddit.com/r/explainlikeimfive/comments/1rls76/official_eli5_bitcoin_thread_round_ii/
- Darkcoin ELI5: http://letstalkbitcoin.com/blog/post/darkcoin-anonymity-is-now-fully-functional-and-open-source-instant-transactions-on-the-way
Charts of Coin Supplies Over Time:
- Monero: https://i.imgur.com/lDqIdyd.png
- Note on Monero: In the future, Monero might have a 1% increase in supply every year as inflation to help miners pay for costs.
- BTC: https://bitcoin.stackexchange.com/questions/161/how-many-bitcoins-will-there-eventually-be
- DarkCoin: https://bitcointalk.org/index.php?topic=421615.msg5845210#msg5845210
