What Is A BIP?
BIP is short for a Bitcoin Improvement Proposal and as the name suggests, they are proposals on how the bitcoin network can be improved. BIPs are one of the most exciting and important parts of how Bitcoin works since they allow for such free and open collaboration by the people who run and use bitcoin. What makes BIPs so amazing is that anyone can submit a proposal on how they think the bitcoin network should improve and if bitcoin nodes, miners, and or wallets want to support a particular BIP, then they can signal support for it.
What Do BIPs Do?
As you begin your journey down the rabbit hole, you will eventually see the term “BIP” on websites, blog posts, social media sites, and forums but what exactly to BIPs do?
BIPs are the user-side system that allows for the system to evolve independently of the miners that run the bitcoin software itself. Some BIPs like BIP 32, BIP 39 and BIP 44 (we will discuss these below) have been adopted by most wallets with more wallets finding more ways to improve the bitcoin space all the time.
One very common BIP that has been implemented by most bitcoin wallets is BIP 32 (see below). If you are using a wallet that creates a new address after each payment you receive, you are using a wallet with BIP 32 support. This particular BIP didn’t require any sort of change to the bitcoin software; it only required wallet creators to adopt an open-source piece of software.
Why Do BIPs Matter?
Bitcoin Improvement Proposals are incredibly fascinating because they allow anyone to take part in how the bitcoin system works. There is no other financial system on earth that allows for such free and open collaboration. If you think that the bitcoin ecosystem can be better than it is, you can put forth a proposal for the community to adopt or join projects that are working on a particular BIP. If wallet providers and bitcoin miners decide to adopt it, a BIP, then it will become part of the bitcoin software or a particular wallet. You simply do not have that power with any legacy finance system or system of government anywhere in the world.
Some Of The Most Common BIPs
Many wallet providers have all come together around certain BIPs for increased compatibility across the entire bitcoin network. Almost every single bitcoin walletWhat Is A Bitcoin Wallet? A Bitcoin wallet is an app or software that enables you to send, receive, and store bitcoin. Although the term "wallet" is commonly used, bitcoin... available today uses at least one of the BIPs on this list. Some of them have implemented several of these BIPs while others may have only implemented one. Let’s take a closer look at a bunch of different Bitcoin Improvement Proposals and how they are trying to improve Bitcoin.
BIP 32
BIP 32 is probably the single most common BIPs in the entire bitcoin space. This BIP is known for the creation of something called an HD Wallet but HD doesn’t stand for “high definition”. HD stands for Hierarchical Determinism and it means that instead of using the same address for each payment received, it generates a new address for each and every payment.
While this might not seem very important, never using the same address more than once actually preserves the privacy of the receiver but also of the sender and even preserves the privacy of the entire bitcoin network since it becomes more difficult to follow ownership of bitcoins when you use a block explorer to look at transactions on the blockchainWhat Is The Blockchain? The blockchain is the public record of bitcoin transactions, which are organized into blocks that are all chronologically linked to one another. Because every block is....
BIP 39
BIP 39 describes the implementation of a mnemonic phrase for the generation of HD wallets. BIP 39 is another one of the most common BIPs that has been adopted by almost every bitcoin wallet in the industry since it is much more difficult to remember a long alphanumeric string than it is to remember 12 – 24 words.
This mnemonic phrase is commonly called a seed phrase and you will see this term used with almost every wallet as well as all over the internet. It is this list of 12-24 seed words that is stored completely offline using a number of seed storage devices.
This 12-24 word seed phraseWhat Is A Seed Phrase? A Bitcoin seed phrase -- also called a recovery phrase, wallet backup seed, or mnemonic phrase -- is a list of 12-24 common English words... is made from a list of more than 2,048 different words so there is a substantial amount of entropy not only from the list of words itself but also from the order of them.
BIP 44
BIP 44 is a wallet side improvement for a multi-account hierarchy of deterministic wallets. BIP 44 is what enables users of a wallet to be able to create a new account to receive and send bitcoin. The key benefit of using such a wallet is that it does not mix bitcoin between different accounts.
The ability to create and maintain different accounts within the same wallet can have some nice privacy implications as well as the ability to effectively account for multiple expense accounts all from a single device.
BIP 47
This is one of our favorite BIPs since it allows users to create something called a payment code, which is not the same as an address. What separates this payment code from a standard address QR code is that a BIP 47 payment code is a QR codeWhat Is A QR Code? A QR Code, short for quick response code, is a type of two-dimensional barcode that can be read by QR scanners, smartphones, tablets, and other... that enables the user to post their payment code publicly while not being able to view all of the transactions associated with that payment code.
If you were to publicly post a standard bitcoin addressWhat Is A Bitcoin Address? A Bitcoin Address, or just Address, is a 26-35 character ID for receiving bitcoin. Most bitcoin addresses begin with 1, 3, or bc1 but there..., anyone in the world is able to view the balance as well as every transaction that the address has received and sent for the life of the address. The end result is a massive loss of privacy for the senders, the recipients, and the bitcoin network as a whole.
BIP 69
BIP 69 is an improvement to decide how inputs and outputs should be used when creating transactions. Currently, certain privacy is lost due to “wallet footprints” and with how UTXOsWhat Is A Bitcoin UTXO? UTXO is short for unspent transaction output and is any particular fraction of a bitcoin that has not been spent. A single UTXO can hold... are consolidated when sending bitcoin.
BIP 69 is a proposal that would allow users to prioritize certain UTXOs and how they are sent in order to increase privacy for both themselves as well as those they have received payments from.
BIP 174
BIP 174 allows for partially signed bitcoin transactions or PSBT for short. Using a wallet with BIP 174 support enables the user to be able to sign transactions in an offline environment and broadcast them to the Bitcoin network at a later time. This means that bitcoin transactions could be signed completely offline where there is no internet connection and then broadcast to the network once you have access to the internet.
PSBT creates a couple of benefits for the users; security as well as functionality.
When a transaction is partially signed offline, it is technically a “cold” environment which provides more security than a wallet that is connected to the internet since this protects against certain malware attacks.
The added functionality of PSBT comes from being able to sign transactions without an internet connection at all and then broadcasting it to the blockchain once an internet connection has been established. This has huge implications for the developing world.
Conclusion
BIPs are one of the most important parts of how the bitcoin ecosystem grows and evolves. They are what allows people from all around the world to take part in the tools that they would like to have to increase bitcoin’s utility in their own locale or globally. There is no other financial system on the planet that allows us to collaborate and improve the way the system works.