• Bitcoin’s change outputs are often referred to as “toxic” and bad for privacy because they make it easier to track related payments.
• CoinJoins are a type of collaborative bitcoin transaction that uses multiple inputs and outputs from many different users, making it hard to track the flows of funds, including change outputs.
• However, most CoinJoin implementations still produce a change output which can be used to undo years of diligent UTXO management.
What Are Change Outputs?
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 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 how easy it makes it for someone to track all related payments.
Why Are Change Outputs Bad For Privacy?
When sending Bitcoin transactions, 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 receiver know without a doubt which one is which. However, the receiver can now track the change output and see where the payment comes from. As pointed out by many Bitcoin privacy researchers, this creates a privacy nightmare that can undo many years of diligent UTXO management.
What Is A CoinJoin?
CoinJoin is a type of collaborative bitcoin transaction that enables you to group up your UTXOs with other people’s coins to gain privacy without ever losing custody of them. Sometimes hundreds of participants join their coins together making it hard to track flows of funds including change outputs in some cases. CoinJoins usually have minimum-amount requirements that users must meet in order to participate and most implementations still produce a change output – though its amount could theoretically be anything – creating high levels obscurity for all participants involved in them..
The Threat Of Denial-Of-Service (DoS) Attacks
However, due to threat of denial-of-service (DoS) attacks against coinjoin transactions with small amounts or low fees there currently isn’t an effective way around having large enough denominations while also ensuring privacy on these types of transactions..