• Change outputs in Bitcoin are bad for privacy as they can be tracked by anyone.
• CoinJoins are a type of collaborative bitcoin transaction that enables users to gain privacy without losing custody of their coins.
• However, CoinJoins still produce a change output which can be used to track payments and undo UTXO management.
What Are Bitcoin Change Outputs?
When making a Bitcoin transaction, instead of only sending the exact amount needed like traditional 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. Outsiders don’t know which output was the payment and which one went back to the sender as change, but receivers can track this change output to see where payments come from. As pointed out by many Bitcoin privacy researchers, this is a privacy nightmare that can undo years of diligent UTXO management.
Why Are Change Outputs “Toxic”?
Change outputs are referred to as “toxic” because they make it easy for anyone to track related payments and compromise user privacy on pseudonymous networks like Bitcoin. This means that even if users have been managing their UTXOs diligently for years, one single change output could be enough for someone to trace all related payments.
CoinJoins To The Rescue?
CoinJoins are a type of collaborative bitcoin transaction that allows users to group up their UTXOs with other people’s coins in order to gain privacy without losing custody over them. Hundreds of participants might join together and make it hard to trace flows of funds including change outputs sometimes. This creates an obscure environment where nobody knows who owns what after the CoinJoin is done. Most implementations have minimum-amount requirements though, so participants must meet these before joining in order to ensure anonymity is preserved.
Are CoinJoins 100% Safe?
Although CoinJoins offer higher levels of obscurity than regular transactions, they still produce some form of change output which could be used (in theory) by outsiders to track payments and undo UTXO management efforts even after taking part in a CoinJoin transaction. It’s important for users looking for absolute anonymity when using Bitcoin not just rely on CoinJoin alone but also use other measures such as masking their IP address or using multiple addresses when sending/receiving funds in order minimize privacy issues associated with using cryptocurrency networks like Bitcoin..
Bitcoin offers great potential for financial freedom and autonomy due its decentralised nature; however, it also has its limitations when it comes down user-privacy due its pseudonymous network model where all users are identified by addresses they use when transacting funds between each other on-chain or off-chain (via sidechains). Change outputs and coinjoins are two concepts often mentioned whenever discussing how best protect user data according personal information safe from unwanted third parties; however both still generate certain levels risk depending how much security measures taken by users themselves beyond these tools available at disposal within cryptocurrency space today .