Introduction to four Types of Bitcoin Addresses

Why We Need Bitcoin Addresses

Transaction Pathways

In the crypto world, wallet addresses are as essential as “bank account numbers” or “shipping addresses”; they are crucial for any operation. A Bitcoin address acts as a digital identifier, similar to a bank account number in the Bitcoin network, defining where funds are sent or received. It serves as a transaction pathway within the Bitcoin network. Bitcoin addresses can be used to send crypto assets to specific addresses, such as BTC, BRC-20 tokens, and other NFTs on the Bitcoin network. They can also be used to receive assets. For instance, Web3 project teams can airdrop tokens into your wallet using your Bitcoin address.

Every transaction involving a Bitcoin address is recorded on the blockchain, ensuring transparency. Since the address is derived from the public key and each transaction is signed with the private key, only the person who has the corresponding private key can complete the transaction. This cryptographic verification mechanism provides the Bitcoin network with high security, preventing tampering and forgery of transactions. As a result, Bitcoin addresses ensure both the transparency and security of transactions.

Identity Verification

Moreover, Bitcoin addresses have introduced a new paradigm for identity verification.

In real life, our identities are typically granted by centralized authorities. For example, individuals use documents such as national ID cards, passports, and driver’s licenses to verify their identity and rely on these documents for activities like healthcare, transportation, and other social services. These forms of identification are issued by government agencies and stored in centralized databases, which are at risk of data breaches.

However, in the world of Web3, individuals can establish their identity through a unique Bitcoin address. This address, composed of characters generated by an algorithm, provides a decentralized identity in Web3. It grants users ownership, control, and management of their identity, removing the reliance on centralized authorities for identity verification. Blockchain technology ensures this verification process. For instance, if you are a contributor to a specific DAO community on BTC, your unique Bitcoin address represents your identity within that community.

However, a single address does not always correspond to a single user. There could be a group of people using one address, or an individual might control multiple addresses. For instance, in the Web3 world, “airdrop farming” involves interacting with a Dapp through a specific blockchain address to receive airdrop rewards from the project. Among airdrop farmers, there are “studios,” where one Bitcoin address is managed by a group, and there are individuals who create multiple accounts, each with its own address.

Obtaining and Paradigms of Bitcoin Addresses

Obtaining an Address

Any Bitcoin user can get an address for free.

Bitcoin Core is a full Bitcoin node software that enables users to participate in the Bitcoin network and manage their Bitcoin assets. Using the Bitcoin Core client, users can generate new Bitcoin addresses for receiving Bitcoin. In the client, you just need to click the “New Address” button, and the system will automatically generate an address for you.

You can also obtain a Bitcoin address through an exchange by registering an account on a centralized exchange like Gate.io. This provides you with a custodial address. You can use this address to deposit Bitcoin network assets into the exchange, such as BTC, USDT, and other cryptocurrencies supported by the exchange. Additionally, you can receive tokens sent to this address by other users.

Additionally, a Bitcoin software wallet is a Bitcoin wallet application that runs on your phone or computer. These wallets provide greater flexibility and control since you have complete control over your private keys. You can also use a software wallet to generate a Bitcoin address. Popular software wallets on the market include MetaMask and Gate’s Web3 wallet.

Address Paradigms

All mainnet Bitcoin addresses begin with the prefixes 1, 3, or bc1. Testnet addresses on the Bitcoin network start with tb1. You might notice that some addresses are longer, start with bc1, and don’t include uppercase letters. This is because they use Bech32 encoding.

Other than the encoding difference, addresses starting with “bc1” function the same as those starting with “1” or “3.”

Here are some examples of Bitcoin addresses:

1LMcKyPmwebfygoeZP8E9jAMS2BcgH3Yip

3E13MQrZvPHqSSTsdQaZzZiYPzjEDT5VKE

bc1qsr03qya584vkdqztxyat3d5s63pjfddy8vwrue

bc1qzyda53xqwkqruex3mzwvpja04x23r572mygpgfc90qckdw2cwwaqr2h70u

  tb1qw2c3lxufxqe2x9s4rdzh65tpf4d7fssjgh8nv6.

Addresses can also be represented as QR codes to help share them with others. For instance, some apps can use a phone’s camera to scan a QR code from another phone, computer screen, or printed paper to get a Bitcoin address.

These addresses reflect different versions of the Bitcoin network, which have evolved through various forks of the network.

Source: @adrienolichon">Geordanna Cordero

Types of Bitcoin Addresses

Legacy/Pay-to-PubKey-Hash (P2PKH) Addresses

These addresses are the traditional Bitcoin addresses, known as Legacy addresses, or P2PKH addresses. P2PKH stands for Pay-to-PubKey-Hash. This name reflects the address generation method used when Bitcoin was introduced in 2009, which involved creating a public/private key pair. At that time, this was the only way to generate an address.

Legacy addresses start with the number 1. These older Legacy addresses are easier to recognize than newer ones, as they use Base58 encoding and are 26 to 36 characters long. For example: “15f12gEh2DFcHyhSyu7v3Bji5T3CJa9Smn”.

Today, these addresses are the most expensive to use in transactions because they require the most block space to store the transaction signature data needed to verify the legality and ownership of the transactions.

The size of transactions is crucial for the overall capacity of the blockchain. Larger transactions take up more block space, which means higher transaction fees are needed to ensure quick confirmation. As a result, Legacy addresses are typically used only with older wallets that are not compatible with newer address types.

It is important to note that if a Legacy address is used for a transaction and the wallet is not compatible with newer addresses (like P2SH or Bech32), assets are typically not lost. However, assets sent to a Legacy address might not be visible. The recipient can solve this by updating their wallet or importing the Legacy address into a new wallet. Additionally, the Bitcoin network might reject these incompatible transactions, causing the funds to be automatically returned to the sender’s wallet.

Pay-to-Script-Hash (P2SH) Address

Unlike traditional addresses that start with “1”, Pay-to-Script-Hash (P2SH) addresses are not derived from public key hashes but from the hashes of specific scripts. These addresses start with “3”, for example: 35PBEaofpUeH8VnnNSorM1QZsadrZoQp4N.

P2SH addresses are useful for transactions that require multiple signatures and can help reduce transaction fees by using Segregated Witness. Sending to a P2SH address is approximately 26% cheaper than using a legacy address wallet.

In a P2SH transaction, the recipient sets a redeem script before receiving Bitcoin, outlining the conditions for spending the funds. The recipient then shares the hash of this redeem script as the P2SH address with the sender. The sender sends the funds to this P2SH address without needing to know the specific spending conditions, as they are hashed. When the recipient wants to use the funds, they must provide the conditions that match the redeem script, which could involve multiple signatures or other specified criteria.

For example, in a multi-signature wallet setup, suppose there are three individuals: Alice, Bob, and Charlie. They collectively manage a multi-signature wallet and choose a 2-of-3 multi-signature scheme. This means that at least two of them must sign off to approve any transaction.

First, each person generates a private key and a corresponding public key.

Alice: Public Key A, Private Key a

Bob: Public Key B, Private Key b

Charlie: Public Key C, Private Key c

Next, they combine these public keys into a redeem script, which defines the multi-signature conditions as follows:

Redeem Script: 2 <A> <B> <C> 3 CHECKMULTISIG

They then hash this redeem script to create a hash value, which becomes the P2SH address.

P2SH Address: 3xxxxx (actual address omitted for brevity)

Alice, Bob, and Charlie give this P2SH address to others for receiving Bitcoin. When someone sends Bitcoin to this P2SH address, the funds are locked at this address and require at least two signatures to be spent.

When they want to spend the funds, they must provide their respective signatures along with the redeem script to prove they are authorized to do so.

For example, if Alice and Bob want to spend the funds, they provide their respective signatures and the redemption script to the Bitcoin network to verify the transaction.

The above example illustrates the process of generating a P2SH address and the operational logic of the multi-signature scheme. This approach provides added security and control, as multiple signatures are needed to execute a transaction, thereby reducing single-point risk.

Source: bitcoinwiki

Segregated Witness (SegWit) Address

SegWit, short for Segregated Witness, separates transaction signatures (“witnesses”) from the transaction data. SegWit addresses come in two formats. One format starts with ‘3’ (Nested P2SH format), which uses an existing P2SH address (starting with ‘3’) and wraps it with a SegWit address, such as “3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy”, to maintain compatibility with older versions. However, this workaround causes SegWit transactions to require about 10% more space, which undermines the original intent of scaling.

The more common format is the Bech32 format, which starts with ‘bc1’ and is also known as Native SegWit. This address format was developed specifically for SegWit and uses Base32 encoding instead of the traditional Base58. This makes calculations easier and more efficient, requires fewer characters, does not distinguish between uppercase and lowercase letters, and allows data to be stored more compactly in QR codes. Additionally, Bech32 offers higher security, optimized checksums, and better error detection, reducing the chances of invalid addresses. For example: “bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq”.

SegWit works by dividing the transaction into two parts. The first part includes the sender’s and receiver’s wallet addresses, while the second part contains the transaction signatures or witness data. This separation allows more transactions to fit into a single Bitcoin block, increasing throughput and reducing transaction fees.

In simple terms, this type of Bitcoin address reduces the amount of information stored in each transaction. Instead of storing signatures and scripts within the transaction, they separate the transaction signatures from the transaction data in the witness. This reduces the size of the transaction data stored in a block, allowing each block to store more transactions. Using SegWit addresses, the Bitcoin network can process more transactions per block, and senders pay lower transaction fees. This improves transaction confirmation times and increases security.

Additionally, because SegWit is a soft fork, SegWit addresses are backward compatible, meaning you can send funds from a SegWit address to a Legacy address.

In summary, transactions from SegWit addresses are smaller in size. Even if the size is the same as older versions, they occupy less block space due to the different calculation of “weight” in the block. Compared to P2SH addresses, SegWit addresses can save about 16% in transaction fees. Compared to Legacy addresses, SegWit addresses save more than 38% in fees. Because of this cost savings, SegWit addresses are the most commonly used Bitcoin transaction addresses.

However, some trading platforms and wallets still do not support SegWit addresses, so they prompt users to send P2SH addresses instead. This is why most wallets still offer the option to create P2SH and even Legacy address wallets.

Source: D’CENT Wallet

Taproot Address

Taproot is a soft fork upgrade to the Bitcoin protocol designed to enhance privacy, flexibility, and scalability. It was introduced through three Bitcoin Improvement Proposals (BIP340, BIP341, and BIP342), which were merged into the Bitcoin core codebase in October 2020 and activated in November 2021. Taproot addresses are the latest type of Bitcoin address, introduced with BIP341 and BIP342, and included in the Bitcoin Core 0.21.0 update.

Taproot addresses build upon SegWit addresses to increase block space efficiency and reduce fees. They are also known as P2TR (pay-to-Taproot). From a technical perspective, Taproot addresses are an upgraded version of SegWit. They start with bc1p and use a modified version of bech32 called bech32m. Addresses are derived from a mnemonic using the BIP86 path (m/86’/0’/0’/0/0).

Example: ”bc1pmzfrwwndsqmk5yh69yjr5lfgfg4ev8c0tsc06e“

Technologically, Taproot addresses enable users to spend tokens using either a single public key or more complex scripts (like multi-signature wallets or smart contracts) through the use of Merkle Abstract Syntax Tree (MAST) and Schnorr signatures. This provides greater privacy and flexibility in transactions.

Specifically, Schnorr signatures are more efficient than the previous Elliptic Curve Digital Signature Algorithm (ECDSA) when verifying multiple transaction signatures. This efficiency helps simplify the entire transaction process and enhances the privacy of multi-signature wallets. In multi-signature transactions, Schnorr signatures can combine multiple signatures into one, reducing the size of the transaction data. This, in turn, lowers transaction fees, improves transaction efficiency, and enhances privacy. It also allows for the use of simpler advanced protocols, such as atomic swaps and payment pools.

Using Schnorr signatures enables more efficient batch transaction processing, where multiple transactions are bundled together for simultaneous verification and execution. This speeds up batch transaction processing, reduces network congestion, and increases network capacity.

Taproot addresses also introduce MAST (Merkleized Abstract Syntax Tree). The core idea of MAST is to store only the results of executed transactions instead of the entire transaction tree. For example, when interacting with complex smart contracts or performing other complicated transactions that involve multiple conditional branches, only the executed path is recorded on the blockchain, while the unexecuted paths are not stored. This reduces storage requirements and improves scalability.

By making complex transactions look like simple single transactions, MAST enhances the privacy of on-chain activities.

Source: Decision’s Blog

Recently, with the BTC halving, the price of Runestone has surged, bringing renewed attention to the BTC ecosystem represented by the Runes protocol. Bitcoin inscriptions are made on Satoshis using the Ordinals protocol, while BRC-20 tokens are deployed by writing JSON data onto Satoshis. The Runes protocol, an alternative to BRC-20, embeds token balances directly within UTXOs and defines specific operations for transfers and creations. This offers a more lightweight and streamlined token issuance and management solution, effectively addressing the junk UTXO problem.

Participating in new Runes issues requires using a Taproot address starting with “bc1p”.

Conclusion

The classification and technical details of Bitcoin addresses illustrate the ongoing evolution and innovation of the Bitcoin network. From traditional Legacy addresses to Segregated Witness addresses and the latest Taproot addresses, each type of address enhances the network’s efficiency, privacy, and flexibility in different ways.

By understanding each address type’s features, strengths, and weaknesses, we can better select the address that meets our needs and fully leverage the benefits of the Bitcoin network. Whether you are an everyday user or a developer, gaining a deeper understanding of Bitcoin address classifications and technologies will help you better engage with the Bitcoin ecosystem and benefit from digital currency’s convenience and innovation.

As the Bitcoin network continues to evolve, we can anticipate more innovations and improvements, bringing greater possibilities to the world of digital currency. The future of Bitcoin looks bright, and we will continue to explore, learn, and grow within this dynamic ecosystem.

May the value of Bitcoin be seen not just in its technology, but also in the trust, freedom, and opportunities it brings. Let us join hands to create a more inclusive, open, and innovative digital currency world, adding more vitality and potential to the future financial system.