We already covered the Bitcoin address in our previous article which can be found here, but in this article, we will dig deeper and explain the differences between the three types of addresses in use today.
We often hear about Segwit or Legacy Bitcoin addresses in the crypto world, which is better, why, etc. Today I will give a clear explanation of both of these types, their pros and cons, and their popularity. At the beginning of the blockchain era, there was only one form of Bitcoin address today known as the Legacy (P2PKH) format BTC address. The next generation BTC address is a Native SegWit (Bech32) format address, which was later developed into Nested SegWit (P2SH) format. All of them are still in use today, and of all mined transactions about 30% are from Legacy addresses, while around 60% are Nested SegWit transactions and around 10% are Native SegWit.
Legacy Bitcoin address
This is the first address type and it has been in use since the beginning of the Bitcoin project. Its address begins with “1” and it is the most common address type. The Legacy address uses a P2PKH format which stands for “Pay To PubKey Hash”. The main disadvantage of Legacy address is a so-called “transaction malleability issue”, which means there is a possibility of tampering with transactions, although there is a small chance someone can actually make a profit from it. If you want to learn more about this weakness of the Legacy BTC address, take a look at this article.
Other than this, the Legacy address has some other weak spots in comparison with SegWit ones. The most important is the fact that a block of transactions with a Legacy address is up to 1Mb in size and it can contain up to 2700 transactions on average. This means that due to the long waiting time for transactions to be mined, Bitcoin can process only 5 transactions per second. This speed is far behind regular fiat money electronic payment orders and leaves BTC transaction’s speed far behind and out of the race. Although the malleability issue is a big disadvantage, the Legacy Bitcoin addresses still hold a significant percentage of BTC transactions.
SegWit Bitcoin address
The SegWit is actually a soft fork of the Bitcoin blockchain introduced by developer Pietter Wiulle with BIP173 (Bitcoin Improvement Proposal) in 2015 and it isn’t just an address improvement, but also a software upgrade. This upgrade was the only solution to push up the speed of BTC transactions by making blocks bigger, up to 4Mb, without making a hard fork. Segwit block structure moves the digital signature outside of the base transaction block and puts it in the witness data extended block, so in case someone changes the signature on the transaction, it will not affect the transaction ID. This is the key to solving the transaction malleability issue.
Segregated Witness or SegWit upgrade went live in 2017 and it has its own upgrade later on to Native SegWit. In short, it actually removes signature and other transaction data (so-called “Witness”), out of the main transaction blocks. This data package will still be transmitted, but it will be stored outside of the base transaction block and inside of the extended transaction block. The only data written in the main transaction block is the information about the sender and receiver to save up to 65% space in the main transaction block, and all the other data is stored in the extended block.
This ingenious move helped not only in security and avoiding malleability issues, but also made the main transaction blocks much lighter and improved transaction speed as more transactions can be fitted in one block. Also, by adding an extended block instead making a main block bigger, we avoided a hard fork which could be very difficult and bring some risks with it.
Nested SegWit Bitcoin address (P2SH) format
The nested SegWit Bitcoin address starts with “3” and it uses Pay To Script Hash (P2SH) which supports more than Legacy Functions with more complex formats , such as specifying multiple digital signatures to authorize transactions. Nested SigWit is a soft fork of the Legacy Bitcoin address and it is backward compatible, which means that users can transfer their BTCs from Legacy to SegWit address as a regular transfer.
Native SegWit Bitcoin address (Bech32) format
Native SegWit Bitcoin address begins with “bc1” and it uses (Bech32) format. This is the least used Bitcoin address type with around 10% of all Bitcoin transactions worldwide and also the least compatible of the three. Bech32 format provides higher security, better optimization, and the checksum error detection code. This address type is the only one that isn’t case-sensitive, which can minimize the chance of invalid addresses. The important note is that most trading platforms allow users to send Bitcoin to a Bech32 address, but they don’t provide an option to receive them in this format.
The percentages of Bitcoin addresses usage timeline
On this chart, we can see significantly less Legacy Bitcoin address usage over time, a trend that will probably continue. SegWit addresses will take a much bigger share of the number of transactions due to all benefits they bring, especially once all exchanges start offering full service, in and out traffic with these addresses. These perks will suppress the usage of Legacy addresses and set a SegWit as a Bitcoin addresses standard down the road, for sure.
Although the Legacy Bitcoin addresses are still in use in significant percentage, we can see so many disadvantages in comparison to SegWit addresses. The most important one is the safety of course, but the speed of transactions and their cost also play a major role in Legacy addresses being abandoned over time. We will probably see some more evolutionary steps for Bitcoin addresses, as already proposed back in 2017. as SegWit2x but it didn’t get approved by the majority of the Bitcoin network.
Whatever happens next in this field we will cover it and keep you informed. Until then, stay safe and stay tuned for more articles.