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Few topics in Bitcoin cause more confusion, anxiety, and loss of money than change addresses. They seem counterintuitive and unnecessary. When used improperly, they can de-anonymize not just the payer but other parties as well. Given the many problems with change addresses, why do they exist in the first place? If change addresses seem confusing, you may be working under some false assumptions about how Bitcoin works. Try this simple test to see for yourself.
Her wallet contains 2. If you answered A, then you may view Bitcoin as a kind of bank account in which a transaction debits an arbitrary amount of money from one account and credits it to another. This is a very common view that is unfortunately incorrect. The correct answer is C: Humans have been using cash for thousands of years, and cash is still important in most parts of the world. Every cash system assigns a face value to a token that can be used as payment. Bitcoin is a cash system that replaces physical tokens with digital tokens called coins or more technically, unspent transaction outputs - UTXOs.
When you receive a payment, you accept one or more of these digital coins. When you make a payment, you reassign ownership of one or more of your coins. A single address can hold multiple coins bitcoin create new address the same time.
Likewise, a transaction may gather coins from the same address, or multiple addresses. Many bitcoin create new address transactions generate change. To make a cash payment, we try to find enough bank notes to meet or exceed the payment amount. Any amount in excess of the required payment is returned as change. The same holds true for Bitcoin transactions. Change bitcoin create new address received by directing it to a designated change address.
Change not recovered by a change address is claimed by miners as a transaction fee. Bitcoin needs change addresses because Bitcoin is a cash system. For more, see Bitcoin: Think of it as Electronic Cash. Payment amounts appear to be deducted from your wallet balance and added to the wallet balance of your payee.
Instead, your wallet digitally signs and broadcasts a transaction to the network. The transaction reassigns ownership of one or more of your bitcoin create new address to your payee, returning any change to an address controlled by the wallet.
Although wallets handle change for you automatically, they can vary greatly in exactly how this is done. Failure to understand the differences can lead to confusion and loss of money. Three main strategies for handling change have been adopted by wallet developers.
Each one has different implications for privacy and security. Wallets can adopt new change-handling behavior depending on user settings and other state. For example, importing a paper wallet into MultiBit results in a two-key system in which change may alternately be sent to the original address bitcoin create new address the paper wallet address, a situation with critical implications for security. Likewise, Electrum permits users to send all change to the same address, effectively creating a Single Address Wallet.
It may seem odd that wallets would generate a new address to accept change. Why not return change to the same address? Why the apparently useless complexity of address pools? The main reason is privacy. By necessity, every Bitcoin transaction becomes part of a permanently viewable global ledger called the block chain. Maintaining privacy in this system depends on a strict separation between addresses and personal identities, a model referred to as pseudonymity. Imagine that a transaction moves a coin from Address A to Address B.
If change is returned to the bitcoin create new address address, the block chain makes it trivial to deduce that the person controlling Address A paid the person controlling Address B. If two payments are made, both payees can easily be identified.
The intended payee address can be trivially determined when change is returned to the sending address left. Multiple transactions make it possible to determine multiple payees unambiguously right. An observer able to link a real-world identity bitcoin create new address Addresses A, B, or C may be bitcoin create new address to deduce the identities of the other parties as well.
Now bitcoin create new address that a transaction moves a coin from address A to Address B, but directs change to Address C. Given another transaction from Bitcoin create new address C, the picture becomes even less clear. Change is returned to a one-use address left.
Each additional payment makes the intended payee more ambiguous right. An observer trying to link real-world identities to Bitcoin addresses must gather more secondary information and work harder when all parties direct change to one-use addresses.
As transactions generate change, eventually this change will be recombined to make purchases. Bringing coins from various change addresses together into a single transaction suggests but does not by itself prove a link to a common user.
Countering this problem requires that additional privacy-enhancing steps be taken. CoinJoin offers one solution, but this is still an area of active research.
Change addresses open the door to loss of funds through several avenues. The most serious problem is that many Bitcoin users are unaware of the existence bitcoin create new address change addresses in the first place. However, bitcoin create new address addresses can cause problems even for users who understand them. Discussion forums like the Bitcoin subreddit are filled with stories of users who either lost money or thought they lost money through change addresses.
For example, her address bitcoin create new address contain dozens of coins with face values totaling 2. Like any cash payment, Bitcoin transactions often generate change. This change must be claimed by a change address or lost. The methods that change addresses are created and used lead to important implications for privacy and security.
As a Bitcoin user, you owe it to yourself to understand change and how your wallet handles it. Test Time If change addresses seem confusing, you may be working under some false assumptions about how Bitcoin works.
Not enough information If you answered A, then you may view Bitcoin as a kind of bank account in which a transaction debits an arbitrary amount of money from one account and credits it to another. Bitcoin is a Cash System Humans have been using cash for thousands of years, and cash is still important in most parts of the world.
Wallets and Change Addresses Three main strategies for handling change have been adopted by wallet developers. Single Address Wallets use one address for receiving both payments and change. Addresses can be added by importing a private key or manually adding a new receiving address. Examples of Single Address Wallets include Blockchain. Random Address Pool Wallets use a pool of randomly-generated addresses to receive payments and change.
If a transaction generates change, it is sent to the next available unused address, causing a new address to be added to the pool. Deterministic Address Pool Wallets use a pool of deterministically-generated addresses to receive payments and change. Given a particular unique seedthese wallets always generate the same sequence of addresses. Examples include Electrum and Armory. Why Not Use the Same Address? Staying Safe Change addresses open the door to loss of funds through several avenues.
Conclusions Bitcoin create new address any cash payment, Bitcoin transactions often generate change. Was this post useful? Get my newsletter direct to your inbox for free.
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