Types of Addresses

Welcome back to our Bitcoin Essentials course! Today, we're diving into a topic that is fundamental to interacting with the Bitcoin network: the types of Bitcoin addresses. These addresses are not just random strings of characters; they are the backbone of Bitcoin transactions, enabling the transfer of value across the globe in a secure and decentralized manner. By the end of this lesson, you'll understand the different types of Bitcoin addresses, how they're generated, and why certain types might be preferred in various situations.

Over time, Bitcoin has undergone significant development, introducing new types of addresses that offer safer, more cost-effective, and private transaction options on the network. However, transitions in technology aren't instantaneous. Funds remain stored in older types of addresses, making it crucial to comprehend the various address formats. This knowledge remains relevant until the widespread adoption of the latest address types occurs.

Legacy addresses start with the number '1'. These address types are also referred to as P2PKH (Pay to Public Key Hash). This format was the original address format for Bitcoin. These addresses are less commonly used today because transactions with this format are larger, resulting in higher fees.

Script addresses begin with the number '3'. The technical name used is P2SH (Pay to Script Hash). Introduced to simplify the use of complex transaction conditions beyond a simple public key hash, such as multisig. Script addresses allow for the sender to send funds to a script hash, with the spending conditions defined by the recipient. This format remains widely used.

Segwit addresses are part of the Segregated Witness (SegWit) protocol upgrade. They start with 'bc1q'. These addresses are also often referred to as Bech32. These offer several benefits, including lower transaction fees. Bech32 addresses are designed to support future network upgrades and features, quickly becoming the accepted new standard.

Taproot addresses, also known as P2TR, are the most recent and advanced bitcoin address format. These start with 'bc1p'. Taproot introduces enhanced security, privacy, flexibility, and scalability to Bitcoin, supporting features like Schnorr Signatures, more flexible multi-key transactions, and advanced scripting for complex smart contracts. Like SegWit, Taproot addresses are opt-in and not currently widely supported, but their adoption is growing. Taproot addresses offer the lowest transaction fees compared to other Bitcoin address types, especially in complex transaction scenarios such as those involving multi-signature setups or advanced smart contracts.

Compatibility between address formats is crucial for seamless transactions across the network. Despite advancements, some older wallets or services may not support the newer Segwit or Taproot addresses, so it's important to ensure your wallet is compatible with the address format you intend to use. Some wallets allow the creation of alternative address types to facilitate transactions with services that have not yet adopted the latest standards.

Understanding these address formats and their compatibility is essential for anyone engaging with the Bitcoin network, ensuring you can receive and send funds efficiently and securely.