The CryptoNote protocol was created in 2013 by an anonymous author or group of authors using the pseudonym Nicolas van Saberhagen. The stated aim of CryptoNote is to address many of the perceived weaknesses in the Bitcoin protocol, specifically in the areas of privacy and fungibility. The CryptoNote protocol is designed to be resistant to analysis of the blockchain, providing users with greater privacy and anonymity.

CryptoNote utilizes several privacy-focused technologies, which combine to create one of the most secure and private blockchain protocols in the world. One of the key features of the CryptoNote protocol is the use of ring signatures, which allow for the creation of virtually untraceable transactions. A ring signature allows a sender to create a signature that includes a group of possible senders, of which the actual sender is one. This makes it difficult for third-party observers to determine the identity of the actual sender.

The CryptoNote protocol also uses stealth addresses to make it difficult for outside observers to link a transaction to a specific recipient. Typically, an address is linked to a digital wallet or user. With stealth addresses, however, a one-time, public, and unique address is created for each transaction. This again provides an extra layer of privacy for users of cryptocurrencies built on the CryptoNote protocol.

Another important feature of the CryptoNote protocol is the special use of Proof of Work (PoW) mining. CryptoNote does not allow mining with the use of ASICs based computers, which makes it difficult for miners to gain an unfair advantage in the mining process by using advanced computational technology. This allows for anyone to use regular computers to mine, and prevents mining centralization to occur. The CryptoNote protocol also includes a dynamic block size that adjusts based on the number of transactions in each block.

Monero, arguably the most well known cryptocurrency that uses the CryptoNote protocol, has made several modifications to the original protocol, including the implementation of bulletproofs.

Bulletproofs

Bulletproofs are a privacy enhancing feature that allow for the verification of a statement without revealing any information beyond the statement itself. Bulletproofs are used to replace the less efficient range proofs that were previously used by Monero and help prevent the creation of fake coins. Bulletproofs also reduce transaction sizes and fees, which allows more transactions in a given time frame, which in turn increases scalability.

According to data from CoinGecko, the top three CryptoNote-based cryptocurrencies by market capitalization are:

• Monero (XMR): $3.3 billion USD
• Aeon (AEON): $18 million USD
• Haven (XHV): $10 million USD

Total market cap in Q1 2023: $3.4 billion

Several other cryptocurrencies besides Monero use the CryptoNote protocol, including:

• Bytecoin (BCN): Bytecoin was the first cryptocurrency to use the CryptoNote protocol. It was launched in 2012 and was the predecessor to Monero. Bytecoin has since been forked into several other cryptocurrencies, including Monero. (Market cap: $18.3 million)
• Electroneum (ETN): Electroneum is a mobile-based cryptocurrency that uses the CryptoNote protocol. It was designed to be easy to use and accessible to a wide range of users, including those without technical knowledge. (Market cap: $62.6 million)
• DigitalNote (XDN): DigitalNote is a privacy-focused cryptocurrency that uses the CryptoNote protocol. It was originally launched as “duckNote” in 2014, and later rebranded to DigitalNote. (Market cap: $2.2 million)
• Boolberry (BBR): Boolberry is a privacy-focused cryptocurrency that uses the CryptoNote protocol. It was launched in 2014 and is designed to be a faster and more efficient version of Monero. (Market cap: $361,000)
• Karbo (KRB): Karbo is a privacy-focused cryptocurrency that uses the CryptoNote protocol. It was launched in 2016 and is designed to be fast and efficient, with low transaction fees and a focus on community development. (Market cap: $216,000)

Total market cap in Q1 2023: $81.7 million.

It is worth noting that while these cryptocurrencies use the CryptoNote protocol, they may differ in terms of their implementation and specific features. As already mentioned, Monero, for example, has made several modifications to the original protocol to further enhance its privacy and security features.

There are several advantages and disadvantages to using cryptocurrencies built on the CryptoNote protocol.

Advantages:

• Privacy and anonymity: The primary advantage of using the CryptoNote protocol is that it provides a relatively high degree of privacy and anonymity for cryptocurrency transactions. This is achieved through the use of features such as ring signatures, stealth addresses, and un-linkable transactions (transactions that cannot be linked to either the sender or receiver by a third-party observer or analyst), which make it difficult for outside observers to determine the identity of the sender or receiver of a transaction.

• Security: The CryptoNote protocol is designed to be secure against various types of attacks, including double-spending attacks, 51% attacks, and Sybil attacks.

• A 51% attack is a type of attack whereby the attacker gains control of a majority of the network’s computing power or mining hash rate. This allows the attacker(s) to modify transaction data, prevent legitimate transactions from being validated, and can even allow the attacker to reverse transactions.

• A Sybil attack is a type of attack wherein an attacker creates a large number of fake identities, or nodes in a network, to gain control or influence over the network. This type tack is more prevalent in peer to peer networks, as the number of nodes is more difficult to verify.

• Double spending attacks are when an individual attempts to spend the same digital asset twice, usually when the individual uses different inputs while submitting them to the network for validation.

• Decentralization: The CryptoNote protocol is designed to be decentralized, meaning that no single entity or group of entities has control over the network. This helps to ensure that the network remains resilient and resistant to censorship or interference from outside parties. In this respect, CryptoNote is like all other blockchain based cryptocurrencies, which are inherently decentralized.

Disadvantages:

• Scalability: One of the main disadvantages of the CryptoNote protocol is that it tends to be less scalable than other many blockchain protocols. The use of ring signatures and stealth addresses usually require more computational resources and storage space, which can make it difficult to scale the network to handle a large volume of transactions. While privacy and anonymity are enhanced, these features come at the price of scalability.

• Adoption: Monero and other cryptocurrencies that utilize the CryptoNote protocol place such a heavy emphasis on privacy, which in turn requires several additional steps and precautions. This can make the CryptoNote protocol more challenging to gain adoption. Furthermore, because of the emphasis on anonymity, Monero and other similar cryptocurrencies may face extra regulatory challenges, either presently or in the future, due to their focus on privacy seen as facilitating illegal activities — whether or not this is actually true.

• Usability: Some users may find the additional privacy and security features offered by the CryptoNote protocol to be more complex or difficult to use than other blockchain protocols. This can make it less accessible to users who are not familiar with the technical aspects of cryptocurrency. Furthermore, with cryptocurrencies like Bitcoin and Ethereum being so easy to use, many may feel that there is no need to use less widely known cryptocurrencies, even if they come with additional benefits vis-à-vis privacy and anonymity.

All in all, the CryptoNote protocol offers a number of advantages in terms of privacy and security, but with those features come drawbacks in the areas of scalability, adoption, and usability. As with any blockchain protocol, the choice of whether to use CryptoNote-based cryptocurrencies should depend on a range of factors, including individual preferences and use cases.