Why does coinbase make 2 transfers instead of one

Question

I'm new to bitcoin in general and coinbase.com in particular. Can somebody explain what happens when I order a payment (in bitcoins) from their web interface?

Say that my acount owns 1 BTC. I create an address AAA to pay 0.1 BTC for my loaf of bread to my baker's address BBB. I order the transfer from coinbase.com web interface, and looking at blockchain.info, I see the following (amounts rounded):

// webUI says I own 1.0 BTC

AAA  pays 0.1032   --> X = 0.1     BTC to BBB (my baker)  // what I wanted
                   --> Y = 0.0002  BTC as network fees    // fine with that
                   --> Z = 0.003   BTC to CCC             // what is that ?

// after payment, webUI says I own 0.8998 (= 1.0 - X - Y)
// The mysterious Z = 0.003 BTC have *not* been removed.

But what is that 0.003 BTC transfer to an address I don't know CCC? Apparently I own this address, or at least coinbase.com does on my behalf. Is it a standard way of processing I'm not aware of? Is it a safety feature managed by coinbase to authenticate the transaction?

Obviously there are a lot of informations on this reddit, but it's too technical for me.

Answer 1

When you receive money, a UTXO (unspent transaction output) is generated and assigned to your address. When you want to spend money, you can only ever spend entire UTXOs. However, you may have received 1 BTC but you only bought goods worth 80 mBTC in an online shop, so you don't want to send your entire 1 BTC UTXO to the merchant.

Enter change. A transaction can have an arbitrary number of outputs. 2 outputs to different addresses are very common. In the scenario described above, you send 80 mBTC to the merchant and 920 mBTC back to you. The latter is called change.

Now, it is possible to send the change back to the address you sent the money from. This way, it's possible to only ever use one address to hold your money. However, people could learn that that you always send from that address and associate it with you. This means reduced privacy.

It's of course not as bad as with banks where it's cumbersome to open a new account, everyone who sends money to you or receives money from you knows your name, you even have to use your ID to get an account in the first place, and in most cases people can even steal money from you when they just know your bank information which everyone you ever exchanged money with using that account knows.

But if it's worth doing, it's worth overdoing, because people. companies, and governments are still trying to figure out who made which transaction. To make this harder, wallet software uses new addresses for each transaction. You cant still receive money again and again payed by different people to the same address and will be able to spend it but if you get an arbitrary number of addresses completely for free, why not take the opportunity to improve your privacy? Some wallets let you control where the change goes but there aren't many reasons to not use a new address each time.