The Rise of Monero: Traceability, Challenges, and Research Review

Monero has emerged as a leading privacy coin for crypto users. However, for investigators and regulatory bodies, Monero presents new hurdles due to unique features that make tracing transactions and uncovering users’ identities challenging. Traditional cryptocurrency investigations rely on transparent blockchain records, but Monero’s advanced privacy features make it a go-to currency for those looking to obfuscate funds.

Due to the privacy features that have made it popular, Monero has also become the subject of rigorous academic research. In a recently published paper, Monero Traceability Heuristics: Wallet Application Bugs and the Mordinal-P2Pool Perspective, TRM researchers conducted a thorough analysis of the traceability of Monero, exploiting current publicly known weaknesses. The authors examined various heuristics to trace transactions and assess their effectiveness, discussing the strengths and weaknesses of Monero's privacy features. This article outlines Monero’s basics, the motivation for this work, and key analytical highlights. 

A growing presence in darknet marketplaces and delistings

Monero's rise is closely linked to the desire for privacy when transferring digital assets. Since Bitcoin’s traceability has become increasingly apparent, darknet marketplaces (DNMs) have started adopting Monero in addition to Bitcoin, with some marketplaces already moving to Monero only. This shift underscores the desire for anonymity in these high-risk environments, where Monero’s ability to hide the source of funds and the identities of buyers and sellers makes it the cryptocurrency of choice.

However, Monero’s growing popularity and use on DNMs have not gone unnoticed. Major exchanges like Binance and OKX have delisted Monero, making it harder for regular users to obtain the coin through traditional, Know-Your-Customer (KYC)-compliant channels. This reduced accessibility has pushed many towards decentralized exchanges and instant swap services that bypass KYC requirements—making Monero transactions even harder to trace. 

While this shift limits access for casual users, it has done little to deter threat actors—and those operating in high-risk categories—who continue to rely on Monero for its privacy. Fully decentralized swap services lack a centralized interface, making it nearly impossible for authorities to shut down or monitor transactions.

The 2023 flooding attack: A test of resilience

In March 2023, Monero faced a major test of its resilience. The network was hit by a flooding attack that overloaded it with transactions, leading to severe congestion. Users found themselves unable to send transactions or make withdrawals from certain services. This attack surfaced vulnerabilities in Monero’s infrastructure and sparked speculation about who might be behind it and whether it was intended to deanonymize users. While the entity “AntiDarknet” has since claimed responsibility, it remains unclear if this is true.

This event shocked the Monero community and triggered even more focus on improving the network. The Monero Research Lab is actively working on new methods to prevent similar attacks and enhance the coin’s privacy features. Monero’s community is known for being proactive in identifying and fixing weaknesses, which helps maintain the integrity and security of the network.

How Monero works: Privacy by design

At the core of Monero is the Cryptonote protocol, which is the engine behind its privacy features. Originally proposed anonymously by Nicolas van Saberhagen in 2012, this protocol was adopted by Monero and improved upon over time. The main focus of Cryptonote—and Monero by extension—is to avoid the traceability present in Bitcoin.

Each of Monero’s core privacy features work together to create a highly secure and anonymous system. Here's a closer look at the key mechanisms.

Stealth addresses

Monero ensures privacy through stealth addresses. Unlike Bitcoin’s reusable public addresses, Monero generates unique, one-time addresses for each transaction. This makes it nearly impossible to link transactions back to a user's primary address, preventing traditional address clustering techniques commonly applied to transparent blockchains like Bitcoin and Ethereum.

Ring Confidential Transactions (RingCT)

Monero also employs Ring Confidential Transactions (RingCT) to hide transaction amounts. Introduced in 2017, this cryptographic method ensures that the amounts being sent are completely hidden from view. Even though all transactions are recorded on the blockchain, there is no way for observers to know exactly how much Monero is being sent.

Ring signatures

Monero’s ring signatures obscure the true spent output by referencing a group of possible outputs, with only one being the actual spend. Outsiders cannot tell which is real and which are decoys. Increasing the ring size to 16 has further enhanced transaction privacy, making it difficult to trace Monero transactions with certainty.

Dandelion++

Monero also employs a network-level privacy feature called Dandelion++. This method helps hide the origin of transactions by forwarding them to trusted peers before broadcasting them to the wider network, thus reducing the risk of someone monitoring the network being able to identify the sender.

Can Monero be traced?

Monero’s privacy features aren’t completely immune to analysis. In the paper, TRM researchers rigorously explore Monero's traceability by assessing various heuristics that investigators can use to determine transaction origins. The research evaluates both traditional and modern methods for assessing Monero’s privacy and shows how Monero has consistently improved its defenses over time.

One of the most notable techniques covered in the paper is the “10 Block Decoy Bug,” which exploited a flaw in Monero’s decoy selection algorithm and affected popular wallet implementations. This bug made it possible to identify the true spend in certain transactions with a high degree of accuracy. By tracking transactions that referenced outputs exactly ten blocks old—the shortest possible period for spending—researchers could identify these transactions as real spends since no decoys were selected from this specific range. However, this vulnerability was patched in early 2023, making it ineffective in current transactions.

Another heuristic examined in the study is the Coinbase output heuristic. This method identifies mining-related outputs in transaction rings and assumes that these outputs are less likely to be actual spends. Since regular users rarely mine Monero, researchers can often use this strategy to eliminate decoys. While it’s not a foolproof method, when combined with other techniques, it can sometimes improve traceability in investigations.

Combined applicability of heuristics

The paper emphasizes that while these heuristics can be useful in specific scenarios, their overall effectiveness has diminished significantly due to Monero’s continuous improvements. Protocol upgrades have increased the ring size, reduced effective traceability, and closed loopholes like the 10 Block Decoy Bug. The study's findings suggest that, although traceability efforts can yield some results in older transactions, Monero remains one of the most secure and private cryptocurrencies available today.

For a more detailed breakdown of these and other heuristics and their applications, the peer-reviewed paper is available for further reading.

The future: Community support and continuous improvement

Despite facing challenges such as exchange delistings and network attacks, Monero continues to thrive due to its strong community and continuous improvements. While some traceability remains possible under specific conditions, Monero’s privacy features make it one of the most secure and anonymous cryptocurrencies available today. 

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