Over the past month, my perspective on Monero (XMR-USD) has shifted, prompting an update to my previous comprehensive report on the cryptocurrency. While I still consider it a highly speculative investment, I am downgrading Monero to a “Hold” due to certain issues that have come to light. In this report, I will delve into two main concerns that have influenced this decision: Monero’s limitations as a base layer chain and the diminishing significance of its ASIC resistance in relation to Bitcoin mining. Let’s explore these issues in more detail.
No Scripts, No L2 Scaling: Monero’s Challenge
Bitcoin and Ethereum have the advantage of scaling through the implementation of layers, which enable users to code certain logic into the blockchain. Ethereum, for example, utilizes rollups, which derive security from the base layer by employing a smart contract to enforce transactions occurring on the rollup. Bitcoin, on the other hand, scales through state channels like the Lightning Network, which relies on programmable spending conditions known as “scripts” on the base layer.
Monero, however, lacks this script functionality. While it employs advanced cryptography to provide privacy, it cannot support higher layer scaling. Without the ability to scale in layers, Monero will struggle to serve a large number of users and achieve mass adoption. This limitation hampers the utility and value of XMR.
Redefining ASIC Resistance and Decentralization
Previously, I praised Monero’s ASIC resistance as a crucial factor for its decentralization. ASIC-resistant mining algorithms prevent specialized mining equipment from dominating the network, making it easier for everyday computers to mine XMR and promoting greater decentralization. However, my perspective has since evolved.
Bitcoin’s ASIC-friendly model, where ASICs can be acquired and expected to retain lasting value due to the network’s stability, offers a different type of decentralization. Bitcoin miners are incentivized to seek out the cheapest sources of power globally, promoting a decentralized mining ecosystem. This decentralized force, driven by profitability, is equally if not more compelling than Monero’s ASIC resistance.
Consequently, the value of Monero’s ASIC resistance in terms of decentralization is called into question when compared to Bitcoin’s model. This realization challenges the assumption that Monero’s ASIC resistance sets it apart as decentralized money.
Assessing Monero’s Relative Advantages
While Monero’s scalability limitations and the changing perception of ASIC resistance raise concerns, the cryptocurrency still possesses a few strengths worth considering:
- Fungibility: Monero’s inherent privacy provides strong fungibility, giving users peace of mind when transacting. However, higher layer scaling solutions in Bitcoin can enhance fungibility, reducing the significance of this advantage on the base layer.
- Tail Emissions: Monero’s tail emission, a block reward of 0.6 XMR per block that will never decrease, addresses the potential security risks associated with Bitcoin’s diminishing block rewards. However, Bitcoin has the flexibility to propose solutions to this issue well before it becomes critical.
- Privacy by Default: Monero’s privacy at the base layer sets it apart from Bitcoin, offering enhanced transaction confidentiality. However, the complexity of Monero’s cryptography increases the base layer’s size, potentially hindering decentralization.
Considering XMR as an Investment
Investing in Monero is not without its challenges. The limited availability of XMR on crypto exchanges and the technical complexity of decentralized exchanges make it difficult to acquire. Additionally, XMR’s value proposition as a “narrative call” centered around privacy relies on the emergence of a significant shift in public sentiment towards privacy in crypto. While a small, speculative allocation to XMR may be appropriate, it is important to weigh the risks and obstacles associated with acquiring and profiting from the asset.
In conclusion, Monero’s downgrade to a “Hold” is driven by concerns surrounding its base layer limitations and the diminishing significance of its ASIC resistance. The cryptocurrency’s comparative advantages must be carefully considered alongside the challenges it faces. As an investor, it is crucial to assess the evolving landscape and adapt investment strategies accordingly.