The cryptocurrency space is innovating at a breakneck pace, trying to chase the always-increasing requirements of users. The invention of new technologies makes older designs obsolete, and this may very well be what’s happening with Bitcoin right now. As it is really hard to make any substantial changes to its code now, second- or third-movers gain a significant advantage by virtue of being able to implement breakthrough developments that are inapplicable to Bitcoin right now, but should have, in hindsight, been a part of it since the start.

One of the principal points of Bitcoin was to provide its adopters with the ability to conduct any transactions they want, without fear of having their identity exposed. The emergence of those who accomplish that more effectively may one day challenge bitcoin for the top of the cryptocurrency heap.

While the Bitcoin Foundation and its Core Development Team continue to add what they feel are the most significant and easily implemented changes; other technologies, such as CryptoNote can provide a possible look into the next generation of cryptocurrencies themselves, it enables the coins that use it a few significant features that Bitcoin and the more traditional altcoins cannot perform at a fundamental level. We can't say if Bitcoin will be challenged by CryptoNote or not, but it has all the tools necessary to give it a real run.

Bitcoin is ironically, both anonymous and traceable. As you likely know, every transaction can be tracked on the blockchain and be linked to the public keys involved in the transaction. In this way, researchers, law enforcement or anyone else determined enough can follow coins through the system and link them to the wallets that held them. Wallets themselves are anonymous in theory and there are plenty of places where a wallet can be created without any link to the physical world, but if any wallet gets linked back to a user (through an email or bank account for an example) it is relatively easy to track every transaction made by that user.

There is plenty of innovation in this space, with Dark Wallet and Coinjoin getting the most attention and working by mixing bitcoins of various users before distributing them back to them or passing them on to the desired account, and they already work with existing Bitcoin technology. But, CryptoNote has another, more radical way to do it. It is a new technology and it could not be easily implemented into the existing Bitcoin blockchain, but does provide an interesting way forward for cryptocurrencies in general.

In simple terms, CryptoNote's ring signatures work not by mixing up various users’ coins, but by signing each transaction with multiple keys. When transactions take place using CryptoNote technology, the sender's and recipient’s public key is mixed with a group of other users' keys. The other keys serve no function other than to mask which key sent the coins. Because of this, anyone trying to look at the ledger and figure out who was involved in a transaction would be able to determine that one of a group of people sent and someone received coins, but would be unable to figure out which individual in the first group sent the coins.

It is a little like giving a five man firing squad one bullet. Only one person actually shot the condemned, but no one knows exactly who. Here, only one wallet was on each end of a transaction, but it is impossible to figure out which one.

CryptoNote's ring signature

Zerocoin is another similar technology that does the same thing, but instead of using a group, it uses the entire population of users by allowing them to exchange their bitcoins for zerocoins and then back again. This could provide even more anonymity but from a technological standpoint it implies that private keys are centralized in the hands of the coin’s developers, which eliminates any sense of anonymity. To further this point, it doesn't appear that Zerocoin has taken off like its creators hoped. It is also going through some changes right now, it was originally meant to run parallel into Bitcoin itself, but reports indicate that the creators may be turning it into a standalone cryptocurrency, so its future is uncertain at this point.

The resulting anonymity of CryptoNote has its advantages and faults, depending on your view of things and what you are trying to accomplish. First and foremost, the CryptoNote fulfills the early promise of cryptocurrencies: providing a completely anonymous way to exchange value between people.

Speaking to Bitcoin Barbie, The director of communication at CryptoNote, Catherine Erwin summed it up:

“[CryptoNote Allows for] [t]otally anonymous and untraceable transactions for individual users. Our ring signatures and one time addresses mark a whole new page in development of cryptocurrencies.”

But, one could argue that it also eliminates the accountability inherent in Bitcoin. Consider for a moment the Mt. Gox situation. Hundreds of thousands of bitcoins went missing – while it is unlikely Gox users will ever recoup their coins, the traceability in Bitcoin offers their best (and perhaps only) hope.

When users noticed that 200,000 bitcoins were being moved in and out of Mt. Gox's wallets, the authorities were immediately notified, causing former Mt. Gox CEO Mark Karples to acknowledge that they had the funds (Mr. Karples told authorities that he had “forgotten” about the wallet containing over 200,000 bitcoins). But, it seems that traceability isn't likely going to end with Gox users recouping much of their losses. Certainly, plenty of people will choose privacy over that alleged security, especially as exchanges become a smaller part of the cryptocurrency landscape thanks to things like multi-signature wallets and decentralized exchanges.

CryptoNote also takes a unique approach on the double spending problem. By giving each transaction a mathematical version of an image that fits a private key. The image can't be used to determine what the private key is, but since every user keeps a copy of every used image, their machines will reject any keys used more than once. (The “images” only exist in math and take up an insignificant amount of storage)

CryptoNote, it should be stressed, is not a currency but a technology used to create them; Bytecoin was the first CryptoNote based coin launched back in 2012. One of the more exciting breakthroughs, which was introduced in Bytecoin, is what’s called by the CryptoNote creators, rather ambitiously, Egalitarian proof of work. It is certainly not the first attempt at trying to exclude the owners of ASIC designs from mining process, but unlike the Scrypt algorithm (which has been the most successful in this matter so far) the CryptoNight (the hashing algorithm that is used by CryptoNote to achieve miners’ equality), albeit as well relying on memory-intensive calculations, makes every new block dependent on all previous ones. This way, anyone who tries to increase their mining capacity through stockpiling RAM will also have to increase the calculation speed exponentially, which makes ASIC mining impossible as of now.

The technology behind CryptoNote is unique and seems to have a few features that Bitcoin and the other big cryptocurrencies lack. Because of this, it and the coins based on its technology, stand a legitimate chance at making a headway into the increasingly competitive and crowded digital currency space. We will be covering major coins that are built upon CryptoNote soon, so stay tuned.