Learn about change addresses in cryptocurrency transactions and how generating new change addresses can enhance privacy.
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In this article:
What are change addresses?
A change address is the address that receives leftover crypto, i.e. change, from a transaction.
Change addresses are an essential feature of UTXO-based assets like Bitcoin.
With UTXO-based assets, funds are sent and received as UTXOs. However, it is not possible to partially spend received UTXOs. It's only possible to spend the full UTXO.
If your unspent UTXO(s) do not amount to exactly the amount you want to send, then your wallet takes the UTXO(s) you are sending and creates two UTXO outputs. Your wallet sends one UTXO to the receiver and then returns the leftover change to your wallet by creating another UTXO that it sends to an address owned by your wallet.
The address that receives the leftover change is referred to as the change address.
This works similarly to the change you get when paying with cash. For example, say you have a 5-dollar bill and want to buy something that costs $3. You can't rip the 5-dollar bill into smaller pieces. Instead, you give away the 5-dollar bill and get a 2-dollar bill back.
Sometimes, the change is sent to a newly generated change address to enhance privacy.
Video tutorial: What are change addresses?
Why does generating a new change address enhance privacy?
Generating a new change address each time you send funds can enhance privacy because the sending address and the change address will not match.
Because the sending address and change address don't match, If someone looks at that transaction on the blockchain, it would be more difficult for them to tell if one of the outputs was a change address owned by the sender.
On the other hand, if the sending address and change address are the same, if someone were looking at the transaction, it would be easier for them to figure out which output is the change address since the change address matches the sending address.
What does a change address look like?
Let's look at a UTXO-based transaction on a block explorer.
In addition to the address to which you sent funds, you will also see another address. This is the change address that receives any leftover crypto returned to your wallet.
If a new address is generated for the change address, then the change address will not be the same as the sending address.
