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When reading the Bitcoin paper by Satoshi, I noticed that he didn't mention any protocol by which the payer can verify the payee's identity, i.e. he is indeed paying the intended recipient. I would be much obliged if somebody can give me an idea on how does it work in real-life transactions or point me towards some definitive article. Since as far as I know, bitcoin doesn't use any central trusted party, so basic digital signature can be vulnerable to MITM attack.

Thank you.

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BIP 70 addresses the issue in merchant/customer use cases:

https://github.com/bitcoin/bips/blob/master/bip-0070.mediawiki

As to individuals I guess there's still room for improvement. Meanwhile check out the following website:

http://onename.io

It's worth noting that by using a single address anonymity is basically thrown away (e.g. everybody can see your balance).

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Bitcoin transactions don't have a sender identifier, instead all one can find is an address owned by someone who previously controlled the transaction's (spent) outputs, which might not actually be the sender (e.g. for e-wallets) in any case, so both parties (sender/recipient) are protected by the protocol's pseudonymity.

In a real-world case, the payment sender (eg buyer) requests to buy a product. The payment receiver (merchant) processes the request and issues a new, unique receiving address in his bitcoin terminal which he then shares with the buyer. The order is then completed when the buyer sends the requested amount (product price, fees) to the specified address and the payment gets confirmed.

There is also BIP 70 which covers this scenario.

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