Nature, origins and technical implications of the different types of Bitcoin addresses. A detailed guide
- What is a Bitcoin address and why is it important?
- Legacy (P2PKH): beginnings and features
- SegWit (P2WPKH): Benefits
- Multisig and P2SH addresses: security and flexibility
- Taproot: the latest generation
- How to choose an address
What is a Bitcoin address and why is it important?
A Bitcoin address acts as a unique reference point for transactions on the Bitcoin network, similar to how a bank account number acts as a reference for financial transactions in the SEPA circuit. If we consider Bitcoin as a global postal system, the address represents the personal mailbox. Anyone can send letters (transactions) to this address, but only the holder of the key (private key) can open the box. But addresses are more than just receptacles: they are the result of cryptographic functions and are fundamental pillars of security and privacy in the Bitcoin system.
Legacy (P2PKH): beginnings and characteristics
Legacy addresses, also known as P2PKH (Pay to Public Key Hash), were the first to be introduced. They are reliable and have the advantage of being widely recognised and compatible with almost all Bitcoin-related software and services. However, they have some limitations. For instance, they tend to require more space on the blockchain, which means that transactions associated with these addresses cost more in fees. They also lack some of the security and efficiency features introduced in more recent versions of Bitcoin addresses.
Legacy addresses begin with the number 1. An example is the following address: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa.
SegWit (P2WPKH): the advantages
SegWit addresses, technically known as P2WPKH (Pay to Witness Public Key Hash), represent a significant step forward. Introduced as part of a network upgrade in 2017, they have changed the way information is stored and transferred on the blockchain. They reduce the amount of space needed for a transaction, thus lowering fees.
SegWit addresses have also introduced new features such as so-called signature malleability, which improves security and enables new types of transactions and smart-contracts. SegWit made it easier, for instance, to implement the Lightning Network, a key technology for enabling instant bitcoin payments.Today, the most popular SegWit addresses are Bech32 addresses, so-called Native SegWit addresses, and they use an even more efficient encoding scheme that further reduces human error when reading addresses.
Native SegWit addresses begin with the characters bc1q . An example is the following address: bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq.
Multisig and P2SH addresses: security and flexibility
Multisig (multi-signature) addresses, also known as P2SH (Pay to Script Hash), offer an additional level of security and flexibility. In a multi-sig environment, more than one key is required to authorise a transaction. This is particularly useful for those environments where the management of funds must be split between several individuals or entities, such as a company. In practice, it is as if the mailbox had several locks and each person had a different key.
The opening options can be different from each other and customised as required. It is possible to set up multisigs where transactions must be signed with two out of three keys to move funds (a 2-of-3 configuration), others require three out of five keys (3-of-5), or any other combination.
This type of configuration reduces the risk of theft or misuse of funds, as approval from multiple parties is required, but also entails greater responsibility for key management. P2SH also offers the flexibility of incorporating other script logics, such as certain smart-contracts, within the address. It is like having an advanced safe that not only has multiple locks, but can also be programmed with different combinations and security features.
Multisig addresses begin with the number 3. An example is the following address: 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy.
Taproot: the latest generation
Taproot addresses represent one of the most recent and significant innovations in the Bitcoin address landscape. Introduced in 2021 as part of an update to the Bitcoin protocol, Taproot aims to improve both the privacy and efficiency of transactions. On a technical level, it combines Schnorr digital signatures with Merkleised Abstract Syntax Trees (MAST) to create a more flexible and optimised environment for smart-contract and other complex applications.
In other words, Taproot offers a way to execute transactions or contracts in such a way that, when viewed externally, they appear as simple A-to-B transactions. This is a big step forward in terms of privacy.
It is important to note that while Taproot offers many advantages, its adoption also requires wallets, exchanges and other services to update their software to support this new functionality. So while Taproot represents the future, it may still be several years before its addresses become the most widely used standard.
Taproot addresses begin with the characters bc1p. An example is the following address: bc1p7qccjx3w3rresq3qc08szdppd25z9xkhrpzzpqgppcml3m5c7nsqc3lja
How to choose an address
The choice of the most suitable type of address depends on various factors, including the needs of each individual, the level of technical competence and the specifications of the service or application to be used. For beginners or those wishing to carry out simple A-to-B transactions, Native SegWit addresses are generally the best choice due to their low fees and already widespread use. For companies, a multi-sig address might be more suitable, as it offers greater levels of security and control.
