Monero - arealive/Viper GitHub Wiki

Taking a high level look under the hood at the privacy part of Monero's protocol, [core developer] Spagni said there are basically three components to it.

The first involves outputs. So in terms of who you are paying, Monero uses something called dual-key stealth addresses. When paying an address with Bitcoin, you can see that address on the blockchain using a block explorer. But Monero uses some non-interactive cryptography between the sender and the recipient without the recipient needing to do anything, which computes a destination, and that destination has a random value.

"If you look at a block explorer every single Monero transaction appears to go to this random address and even though multiple transactions might go to the same person, you can't tell that they are going to the same person because they all seem to be going to different random addresses. So that sort of already breaks a lot of the linkability."

To further obfuscate traceability, Monero uses ring signatures. This means that instead of coins coming from a previous transaction, they appear to come from that transaction and a number of others. There is no way for an observer to tell which one of those transactions is the real one.

The third component is something called ring CT which stands for ring confidential transactions. Spagni explained: "Ring CT is based on Greg Maxwell's work on confidential transactions, and from a lot of that ground work we created a novel cryptographic signature scheme, which allows us to hide or obscure amounts in Monero...

One of Monero's strongest points is that we don't use new cryptography; the cryptography we are using is stuff from like 2005, 2006 at the newest. And most of the stuff much older so tried and tested and proven cryptography plays a big role.¹

[1] http://www.ibtimes.co.uk/monero-opens-were-about-private-you-can-get-1580481