Protect Your Privacy: Avoid Bitcoin Change Outputs29. March 2023
• Bitcoin transactions involve sending all the sats from the original address into new ones, creating a change output.
• Change outputs are bad for privacy as they can easily be tracked by outsiders.
• CoinJoin is a type of collaborative bitcoin transaction that enables users to group up their UTXOs with other people’s coins to gain privacy, without ever losing custody of them.
Bitcoin Transactions and Change Outputs
Much ink has been spilled on the privacy horrors of change outputs for Bitcoin. It is now widely understood that Bitcoin is a pseudonymous network, where all users are identified by the addresses they use. When making a bitcoin transaction, instead of only sending the exact amount that is needed — like in traditional, account-based payment systems — you send all the sats from the original address into new ones. This creates a change output, which is the amount you get back when making a payment. Such a change output is quite bad for privacy, as most users underestimate, or sometimes completely ignore, how easy it makes it for someone to track all related payments.
Why Change Outputs Are “Toxic”
In the above picture, we can see that everything from the address on the left got moved into two addresses on the right, while a third, small part was spent as a Bitcoin network transaction fee. Outsiders don’t necessarily know at this point which output was the payment and which one went back to the sender as change. Only the sender and the receiver know without a doubt which one is which. However, the receiver can now track the change output and see where payments come from – an issue that many Bitcoin researchers have highlighted as being particularly harmful to user privacy when considering UTXO management over long periods of time.
CoinJoins To The Rescue?
CoinJoin enables users to group up their UTXOs with other people’s coins in order to gain increased levels of privacy without ever having to lose custody of them during transactions; sometimes hundreds of participants join their coins together making it hard for anyone outside this group to track flows of funds – including any potential change outputs in some cases. CoinJoins usually have minimum-amount requirements that must be met in order for users to participate; most implementations still produce some form of change output though these amounts vary greatly depending on who’s participating in each individual CoinJoin session.
Equal Denominations For Maximum Obscurity
The commonly used method when implementing CoinJoins involves creating multiple outputs with equal denominations so they become indistinguishable from each other; this provides maximum obscurity for all participants involved in any given CoinJoin session whilst also protecting against potential DoS attacks targeting specific wallets or addresses involved in such sessions (as attackers will not be able to tell which wallet belongs to whom).
In conclusion: Change outputs are often referred to as “toxic” due to how easy they make it for someone else outside your direct circle (i.e., sender & receiver)to track payments; however by participating in collaborative bitcoin transactions known as CoinJoins individuals can increase their levels of privacy through obscuring both inputs & outputs by creating multiple denominations identical values – thus providing maximum protection against potential attacks targeting certain wallets/addresses involved in such sessions..