What are change addresses?
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To understand what a change address is, first, we should outline how a transaction with cryptocurrency works.
Each transaction is comprised of at least one input and output. Inputs and outputs are how the breakdown or denomination of cryptocurrency happens as funds are transacted across the network.
Inputs and Outputs Explained
A transaction input is the address where the coins were sent from. An output is the address to where the coins were sent to.
Inputs are the coins existing in your wallet that are used when sending a transaction. When those coins come out on the receiving end of the transaction, they become outputs.
From one transaction to the next, each input is the output of a previous transaction.
To explain this further, lets us traditional currency such as USD, for example. You make a purchase and buy something for $10 from a friend, handing them a $10 dollar bill. Later that day, the friend who accepted your $10, goes to buy a piece of pizza for dinner. Your friend pays the restaurant with the same $10 that you handed to him/her.
Circling back to your transaction, the $10 was your output and your friend’s input.
In the pizza transaction, the $10 was your friend’s output and the restaurant’s input.
What happens if your purchase doesn’t cost $10, but it costs, lets say, $5? Since all you have is one $10 bill, you can’t pay exactly $5. In this case, you’d pay with the $10 bill, and the seller will give you a $5 bill as your change.
Now, regarding cryptocurrency transactions. Change plays a similar role as the explanation we used above that involves USD. When using an input which contains more coins than the transaction’s total value, the difference in funds are sent back to you in a newly generated address, called a change address. The coins do not return to the same address that you sent them from.
When sending coins, change addresses are generated by your wallet. You won’t see separate transactions in your transaction history for receiving your change — they are included in the original sending transactions as a second output.
You can view your change address for any given outgoing transaction by going to the block explorer and viewing the transaction details.
There are times when your transaction may not use a change address. If you spend the exact balance of an input, you won’t need change. Similar you paying with exact change for a good or service. The seller will not need to give you change for the difference.
Change addresses are an aspect of cryptocurrency that allows users to use specific amounts, even if the transaction isn’t the total amount of the output being spent.
It is similar to transacting with cash. If the buyer pays with a $20 bill, but the transaction costs $5, they would receive $15 in change back. In cryptocurrency, the difference between the total amount paid and the total transaction cost is sent back to the user as “change” through the use of a change address.