Possible Misconception: Bitcoin Wallet Singular

There is a possible misconception which people might have about how Bitcoin Wallets work, which I would say, because I had this misconception myself until only very recently. Many popular Bitcoin Wallets present themselves to the user as having one balance at one time.

Each time we receive funds, most of the time, we will want to receive those funds to a separately-created Address. And the difference between the Address and the Public Key, is mainly one in formatting of the binary data.

What many Wallets do not show the user, is that each receiving Address continues to hold its own balance. This means that when we tell such a Wallet to Send an amount of Bitcoins to another recipient, which is larger than the balance we hold on any one of our own Addresses, what our Wallet tends to try to do, is to make numerous transactions, one from each Address, all to the same recipient, until the total amount of funds has reached the amount we asked to Send.

Each of those Addresses, being a Public Key, has its own Private Key, which we must unlock across-the-board, at least until the transaction is complete. And each Private Key, therefore, only has a limited amount of Funds it can Send. Balances are not allowed to go negative.

And so what can happen to many users, is that our Wallets become fragmented, with only a small balance associated with each of our Addresses, many of which might have started out as having a larger, received balance. And sometimes, the P2P network can be reluctant to process such a transaction, because it represents a load on the network.

And so an operation that some Wallets recommend, is that if we have many small balances, eventually to transfer a larger sum, out of those balances, to a new, single receiving Address we have in our own, same Bitcoin Wallet. This incurs the transaction fee normally associated with such an operation, but the only benefit to us, is that we will have a single, larger balance afterward.

Other types of Wallets do not show us, how much of our balance is associated with each Address.


What this also means, in connection with what I wrote before, about being able to Sweep one Address, is that this ability is usually not so sweeping in practice. Since a wallet with 10 Addresses that hold balances, can also have 10 Private Keys, the program from which we might want to do the Sweeping, will need each of the Private Keys, in order to empty out a whole Wallet, for example.

From the security perspective, it could become a more complicated action, to steal 10 Private Keys, than it would have been simply to Steal 1 Private Key. And for off-line Wallets, this can be a limiting factor. We can only write down a limited number of Private Keys by hand, on a sheet of paper, for example.

Dirk

 

Print Friendly, PDF & Email

Leave a Reply

Your email address will not be published. Required fields are marked *

Please Prove You Are Not A Robot *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>