Bitcoin addresses are essential components in the process of sending and receiving BTC. Over the years, different address formats have been developed, each with unique features and benefits. The three primary types of Bitcoin addresses are P2PKH (Legacy), P2SH, and P2WPKH (Bech32). Each of these formats has implications for transaction costs and performance, making it crucial for users to understand their differences.

Bitcoin Address Formats

1. P2PKH (Pay-to-PubKey Hash) – Legacy Address
   • Format: This is the original Bitcoin address format, recognizable by its beginning with the number “1”. It ranges from 26 to 36 characters in length.
   • Example: 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa
   • Characteristics: Transactions from P2PKH addresses are larger in size, leading to higher transaction fees. This is because the older format requires more data to be included in each transaction, which increases the overall transaction size. Despite being outdated, many users and services still use P2PKH addresses.
2. P2SH (Pay-to-Script Hash) – Segregated Witness (SegWit) Compatible
   • Format: P2SH addresses start with the number “3” and are also 26 to 36 characters long.
   • Example: 3GRdnTq18LyNveWa1gQJcgp8qEnzijv5vR
   • Characteristics: P2SH addresses were introduced to allow more complex transaction types, such as multi-signature transactions. They are more efficient than P2PKH addresses, as they typically require lower transaction fees due to reduced transaction size. Although P2SH can be used for non-SegWit transactions, it is also compatible with SegWit, which further enhances its efficiency.
3. P2WPKH (Pay-to-Witness Public Key Hash) – Bech32
   • Format: This is the newest address format, beginning with “bc1” and longer than the other formats.
   • Example: bc1qnkyhslv83yyp0q0suxw0uj3lg9drgqq9c0auzc
   • Characteristics: Bech32 addresses are designed for maximum efficiency. They are the native format for SegWit, significantly reducing transaction sizes and fees. Bech32 addresses are more than 40% cheaper to use compared to P2PKH addresses and more than 15% cheaper compared to P2SH addresses. However, the main limitation is that not all wallets and systems currently support Bech32, which might restrict its usage in some scenarios.

Performance Comparison of Bitcoin Address Types

The choice of Bitcoin address format has a direct impact on transaction performance, especially in terms of transaction weight and associated fees. Below is a comparison of the average transaction weight depending on the sender and recipient address types:

• P2PKH (Legacy) Sender
  • To P2PKH (Legacy): Average transaction weight is 764 bytes. This combination is the least efficient, leading to higher fees.
  • To P2SH: Average transaction weight is 756 bytes.
  • To Bech32: Average transaction weight is 752 bytes.
• P2SH Sender
  • To P2PKH (Legacy): Average transaction weight is 541 bytes, making it 29% more efficient than using a P2PKH sender.
  • To P2SH: Average transaction weight is 533 bytes.
  • To Bech32: Average transaction weight is 529 bytes.
• Bech32 (P2WPKH) Sender
  • To P2PKH (Legacy): Average transaction weight is 449 bytes. This is over 40% more efficient compared to transactions from a P2PKH sender.
  • To P2SH: Average transaction weight is 441 bytes.
  • To Bech32: Average transaction weight is 437 bytes, making it the most efficient option.

When choosing a Bitcoin address format, it’s important to consider the implications for transaction costs and efficiency. Legacy P2PKH addresses are less efficient and more expensive to use, while P2SH addresses offer better performance and are compatible with more advanced transaction types. Bech32 addresses provide the highest efficiency and the lowest transaction costs but may not be supported by all wallets and services.

For users looking to minimize transaction fees and optimize performance, transitioning to Bech32 addresses is the most beneficial choice, provided that their wallet or service supports it. As the Bitcoin network continues to evolve, it’s likely that Bech32 will become increasingly popular, making it the standard for efficient Bitcoin transactions.