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3 Removed the 8bit addresses comment
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The software limiting factor is the size of the address used for the slaves: 7-bit, 8-bit, or 10-bit, which support 127, 255, and 1023 devices, respectively. Physically, there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. As examples, the MPU6050 gyroscope only supports two addresses, and some devices reserve specific addresses for special purposes.

The software limiting factor is the size of the address used for the slaves: 7-bit, 8-bit, or 10-bit, which support 127, 255, and 1023 devices, respectively. Physically, there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. As examples, the MPU6050 gyroscope only supports two addresses, and some devices reserve specific addresses for special purposes.

The software limiting factor is the size of the address used for the slaves: 7-bit or 10-bit, which support 127 and 1023 devices, respectively. Physically, there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. As examples, the MPU6050 gyroscope only supports two addresses, and some devices reserve specific addresses for special purposes.

2 account for reserved addresses in examples
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The software limiting factor is the size of the address used for the slaves: 7-bit, 8-bit, or 10-bit. They, which support 127, 255, and 1023 devices, respectively. Physically, there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. For exampleAs examples, the MPU6050 gyroscope only supports two addresses, and some devices reserve specific addresses for special purposes.  

The software limiting factor is the size of the address used for the slaves 7-bit, 8-bit, or 10-bit. They support 127, 255, and 1023 devices respectively. Physically there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. For example the MPU6050 gyroscope only supports two addresses.  

The software limiting factor is the size of the address used for the slaves: 7-bit, 8-bit, or 10-bit, which support 127, 255, and 1023 devices, respectively. Physically, there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. As examples, the MPU6050 gyroscope only supports two addresses, and some devices reserve specific addresses for special purposes.

    Bounty Ended with 100 reputation awarded by Junior
1
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The software limiting factor is the size of the address used for the slaves 7-bit, 8-bit, or 10-bit. They support 127, 255, and 1023 devices respectively. Physically there are two restrictions. First, the physical size of the bus because the bus is only meant for short runs (the inter IC part). If the bus is too large there are capacitive loading and propagation delay effects that need to be dealt with. Second, some devices can't support the full range of I2C addresses. For example the MPU6050 gyroscope only supports two addresses.