Types of Bitcoin addresses: An overview

Bitcoin addresses, consisting of alphanumeric characters, are necessary for transactions. Comprehending their components is essential for secure, accurate transfers. This article explains the different address format types for Bitcoin and how to interpret Bitcoin addresses correctly.

What is a Bitcoin address?

A Bitcoin address is an alphanumeric string that is specific to a Bitcoin transaction’s destination. These addresses usually begin with “1,” “3” or “bc1” and are case-sensitive. They act as the recipient’s unique identification, enabling safe sending and receiving of Bitcoin 
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 throughout the decentralized network. Public and private key pairs are the foundation of a Bitcoin address; the public key is transformed into a shorter, more manageable version for sharing purposes. The recipient’s address is used to prove ownership of funds received, and transactions are recorded on the blockchain.
These addresses are necessary for validating and confirming transactions within the Bitcoin network, but they also give users a certain amount of anonymity because they conceal personal information such as names and locations.

How are Bitcoin addresses derived?

Bitcoin addresses are derived from public keys via encoding and hashing. Because they enable the creation of digital signatures in Bitcoin transactions, public keys — which are derived from private keys — are essential. These signatures allow transactions on the blockchain and verify who owns the funds.
A vital component of Bitcoin’s operation, hash functions are used to construct fixed-length, shorter representations of data, including public keys. These hash algorithms ensure that Bitcoin addresses are compact and standardized, which makes data storage and transfer on the blockchain network more effective.

Different formats of Bitcoin address

There are several Bitcoin address formats due to the evolution of Bitcoin’s technology and the need to accommodate various functionalities while still being compatible with existing systems. Bitcoin testnet addresses starting with “2” typically use a Testnet Pay-to-Witness-Public-Key-Hash (P2WPKH) address format in Segregated Witness (SegWit). These addresses are used for testing and experimentation on the Bitcoin testnet network, allowing developers to explore new features and applications without risking real Bitcoin.
Often, Bitcoin addresses are displayed as QR codes to make it easier to scan and transact using mobile devices. Users can interact using various Bitcoin address formats, as explained below:

Legacy (P2PKH)

This is the widely used original format encoded using Base58, which excludes characters that are frequently confused with one another. Addresses starting with “1” use the Pay-to-Public-Key-Hash (P2PKH) script type and are case-sensitive. In the context of P2PKH, “Pay-to” refers to the recipient’s ability to claim the funds, “Public-Key” refers to the recipient’s public cryptographic key, and “Hash” refers to a cryptographic hash of the public key.
They offer a straightforward way to send and receive Bitcoin since they are generated from the hash of the recipient’s public key. Legacy addresses are widely compatible because the majority of wallets and exchanges support them.

SegWit (P2SH)

The Bitcoin network’s scalability problems were addressed with the introduction of SegWit. Addresses starting with “3” use Base58 encoding, are based on the Pay-to-Script-Hash (P2SH) script type and are case-sensitive like legacy addresses. 
In the context of P2SH, “Pay-to” indicates the recipient’s capability to access the funds, “Script” represents a complex set of instructions defining conditions to spend the funds, and “Hash” refers to the cryptographic hash of the script, allowing for secure transactions to addresses derived from these hashes.

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By separating signature data from transaction data, SegWit addresses offer many benefits, including higher transaction throughput and lower fees. This format increases the overall effectiveness of the Bitcoin network and makes it possible to integrate advanced features like the Lightning Network.

Bech32 (Native SegWit)

Addresses that begin with “bc1,” or Bech32 addresses, are based on the native SegWit protocol. They offer the lowest transaction fees and the most effective use of block space. Compared with earlier forms, Bech32 addresses only use lowercase letters, provide improved error detection and are more understandable by humans. They are best suited for new services and apps that seek to leverage the full capabilities of the Bitcoin network and encourage the adoption of SegWit technology.

Taproot address (P2TR)

Taproot (P2TR) addresses, also called Taproot or Bech32m, are the latest and most advanced format in Bitcoin. These addresses are case-insensitive and begin with bc1p. They improve scalability, flexibility, privacy and security, but they are opt-in and not yet commonly supported, much like SegWit. Taproot offers benefits like Schnorr signatures, which lower costs, increase security and also make it possible to build smart contracts. 

Breaking down the Bitcoin address

Using a hypothetical Bitcoin address, such as 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa, let’s understand various components of a Bitcoin address:

• Length: The average length of a Bitcoin address is between 26 and 35 characters.
• Alphanumeric characters: They are made up of numbers and letters, both capital and lowercase; to prevent confusion, they include neither the number “0” nor the letters “O,” “I,” and “l.”
• Version prefix: In the P2PKH format, standard Bitcoin addresses begin with “1” as the version prefix.
• Checksum: To ensure correctness and identify typing errors, Bitcoin addresses have a checksum.
• Base58 encoding: Base58 encrypts addresses by removing any potentially confusing characters.
• Public key hash: The hash of the recipient’s public key forms the basis of a Bitcoin address. Within the Bitcoin network, this hash gives the recipient a unique identity.

What is a change address in Bitcoin?

In a Bitcoin transaction, a change address is an extra output address that receives any remaining funds from the inputs. The extra amount, referred to as the change, is sent back to one of the sender’s addresses when a transaction is created if the total value of the inputs exceeds the amount being transferred.
This ensures that the inputs’ whole value is accounted for and not lost. Change addresses obscure which output is the change and which is the payment, assisting in the preservation of security and anonymity.
Imagine Bob has 1 BTC in his wallet, and he wants to send Alice 0.5 BTC. Bob initiates a transaction so that Alice can get the designated sum. Bob adds a change address from his own wallet to receive the final 0.5 BTC in addition to Alice’s address as the beneficiary. 
With this modification, the whole value of his initial unspent transaction output (UTXO) is accounted for and not lost. UTXO represents Bitcoin received and not yet spent, serving as input for new transactions, ensuring ownership and preventing double-spending.
Alice receives 0.5 BTC upon transaction confirmation, and Bob’s wallet now has two UTXOs — one for the amount delivered to Alice and one for the change. By doing this, Bob keeps control over his funds and makes sure that no Bitcoin is lost during the transaction.

The significance of validating Bitcoin addresses

It’s important to validate an address to ensure it’s accurate and in the correct format before sending Bitcoin to it or completing any transactions. This step is crucial to avoid losing funds as a result of fraud or typographical errors.
Compatibility with the wallet or service in question is an important consideration when working with Bitcoin addresses, especially when transferring money between legacy, SegWit and Bech32 address types. It is crucial to confirm address formats to ensure smooth transactions across several platforms, as failure to do so may lead to transaction mistakes or financial loss.
Fortunately, address validation procedures are frequently included in Bitcoin wallets. By assisting customers in confirming the accuracy of the address before completing any transactions, these capabilities give users an extra degree of security and comfort. Users can reduce the possibility of sending Bitcoin to erroneous or invalid addresses by utilizing address validation tools, protecting their funds within the crypto ecosystem.