Monero (XMR) is a popular cryptocurrency known for its focus on privacy and anonymity. However, recent developments have led to a change in perspective regarding Monero’s potential and future prospects. As a result, I am downgrading my recommendation on Monero to a Hold.
One of the main issues with Monero is its limited scalability as a base layer chain. Unlike Bitcoin and Ethereum, which are capable of scaling through the use of additional layers, Monero lacks the ability to add more layers due to technical constraints. This means that Monero will continue to operate primarily as a base layer chain, which limits its potential for scaling and adoption.
In order to scale effectively, blockchains like Bitcoin and Ethereum rely on the use of programmable logic, or scripts, at the base layer. These scripts allow for the implementation of additional layers, such as the Lightning Network for Bitcoin or rollups for Ethereum. However, Monero does not have this capability. While it utilizes advanced cryptography to obfuscate transactions and provide privacy, it lacks the ability to enforce the security of higher layers. Without this programmability, Monero cannot support higher layer scaling, which is necessary for widespread adoption.
The importance of scaling in layers is evident in the success of Bitcoin and Ethereum compared to other blockchains that have attempted to scale solely on the base layer. Examples like Bitcoin Cash and Bitcoin SV, which were hard forked from Bitcoin to increase block sizes, have not seen the same level of success and have significantly lower market caps. The market clearly indicates that a layer-based approach to scaling is more effective.
Furthermore, my previous belief that Monero’s ASIC resistance contributes to decentralization is now being questioned. ASIC resistance refers to the ability of a blockchain to prevent the use of specialized mining hardware called ASICs, allowing for more widespread participation in mining. However, the dominance of ASICs in Bitcoin mining has actually led to another form of decentralization. Because Bitcoin’s proof-of-work algorithm has remained unchanged, ASICs can be acquired and expected to retain their value. This incentivizes miners to seek out the cheapest sources of power, leading to a decentralized distribution of mining operations worldwide.
This realization undermines the argument that Monero’s ASIC resistance is a significant advantage. Instead, it appears that Bitcoin’s acceptance and use of ASICs actually promotes decentralization through the pursuit of cheap energy sources. This forces larger-scale mining operations to compete with smaller, more mobile miners, ultimately contributing to a more decentralized network.
In summary, Monero’s limitations as a base layer chain and the diminishing importance of ASIC resistance have led to a change in perspective on the cryptocurrency. While Monero still has potential as a highly speculative investment within a digital asset portfolio, its scalability challenges and lack of programmability at the base layer hinder its ability to achieve mass adoption. As a result, I downgrade my recommendation to a Hold.
