PayJoin (also known as “P2EP” or “Pay-to-EndPoint”) is a privacy-enhancing technique for bitcoin transactions. It is a type of CoinJoin transaction, which allows multiple users to combine their bitcoin inputs and outputs into a single transaction, thereby increasing privacy and fungibility.
However, PayJoin goes one step further than traditional CoinJoin transactions by allowing only two parties to participate in the transaction, the sender and the receiver. This means that the transaction is not visible on the blockchain as a typical CoinJoin transaction, where multiple parties participate. Instead, it appears as a regular transaction between two parties, making it difficult for blockchain analytics tools to trace the origin and destination of the funds.
Also read: What’s CoinJoin?
In a PayJoin transaction, both the sender and the receiver contribute inputs to the transaction, which are then mixed together and distributed among the outputs. This makes it difficult for outside observers to determine which output belongs to which participant, thereby increasing the privacy of the transaction.
How Does PayJoin Work?
PayJoin works by allowing two parties to collaborate in creating a Bitcoin transaction that obfuscates the origin and destination of the funds being transacted. Here are the basic steps involved in a PayJoin transaction:
- The sender initiates the transaction and sends a request to the receiver to participate in a PayJoin transaction.
- The receiver agrees to participate and generates a unique bitcoin address, which they share with the sender.
- The sender sends bitcoin to the receiver’s address, and the receiver also contributes bitcoin to the transaction.
- The inputs from the sender and receiver are combined, and the transaction is constructed so that the outputs cannot be easily attributed to either participant.
- The transaction is signed by both parties, and the bitcoin is sent to the agreed-upon destination.
- The PayJoin transaction is broadcast to the Bitcoin network, and it appears as a regular transaction between two parties.
PayJoin is an important development for bitcoin privacy, as it allows for increased privacy without requiring users to sacrifice the convenience and speed of a regular bitcoin transaction. Additionally, PayJoin can help to improve bitcoin fungibility. Bitcoin fungibility means that all bitcoins are considered equal and have the same value, regardless of their transaction history or origin. This allows one bitcoin unit to be interchangeable with any other bitcoin unit.