There are several address formats on the Bitcoin network. Each type has its own distinguished technologies and user benefits - in particular, the ability to pay lower transaction fees. Let’s see how to get more by paying less. 👍
How many address types Bitcoin has?
There are four address types, called Legacy (P2PKH), Script (P2SH), SegWit (P2WPKH), and Taproot (P2TR).
Firstly, we shall know the visual difference.
You can easily define a specific address type by just looking at its prefix. 👀
Starts with the number 1
Starts with number 3
Starts with “bc1q”
Starts with “bc1p”
Now, when the syntax is clear we can get to the differences.
Legacy address type was the very first address standard introduced to the bitcoin network, proposed by Satoshi Nakamoto back in the day. It can also be called P2PKH (Pay To Public Key Hash), since it requires the public key and the recipient signing a signature calculated from the private key. 🔑
Both incoming and outgoing transfers from such addresses are supported by all wallets and applications running on the Bitcoin network. The main disadvantage of Legacy addresses is high fees. High QR-code weight and low control sum double hashing speed is also peculiar for this kind of address. 🥱
Script addresses were introduced in the 2012 Bitcoin Improvement Proposal BIP-0016 thanks to Bitcoin Foundation Chief Scientist Gavin Andresen.
They have the same structure as Legacy addresses, but start with the number 3.
Such addresses assume that when transferring funds, the recipient must have a script that matches the hash script. This feature allowed to reduce the transfer fee, pass the fee on to the recipient, and create multi-signature addresses when introduced. ✍️
In the spring of 2016, developers Peter Welle and Greg Maxwell suggested a completely new type of address called Bech32 in the BIP-0173 update. It is also called SegWit (Segregated Witness) or P2WPKH (Pay to Witness Public Key Hash). 🙌
Such addresses use the unique SegWit protocol, which allows you to reduce the block size in the Bitcoin network by deleting the signature from it. Reducing a block size consequently makes transaction fees even lower than when using the previous two standards. The corresponding update was activated at the end of August 2017. ⏳
Right now, SegWit is used by 85% of transactions.
The last Bitcoin update was finished in 2021 and introduced the last generation address type - Taproot. 🌳
Taproot addresses are leading the Bitcoin network in terms of fees compared to other formats as well as allow cheaper payments on the Lightning Network. ⚡️
However, Taproot has a huge drawback nowadays - it is currently supported by a minor number of wallets. In mid-August 2022, only 0.56% of all outgoing transfers in the Bitcoin network were made from addresses of this type. 😕
As we can see, every cryptocurrency in the industry is evolving and Bitcoin is no exception. No one wants to overpay and if you are still an owner of the first two generations addresses, might consider switching to the newer SigWit or even to the TapRoot - don’t worry about the small user base, every technology needs time to get its place in the industry. 😉
Stay tuned 📻