In view of the recent increase in bitcoin transaction fees, it is fashionable to talk about the consolidation of UTXOs.
Bitcoin transaction fees
The 21M limit is protected by decentralization which is itself ensured by slow growth in the size of the blockchain. The transaction throughput of bitcoin must remain low or risk centralization and, ultimately, collapse.
This low speed is compensated by the Lightning Network, “layer 2”. The LN allows bitcoin to outperform major payment networks like SWIFT, Visa or Mastercard.
But when it comes to “on-chain” transactions, the throughput must be limited. This sometimes results in periods of high transaction fees. Several tens of euros compared to a few tens of cents in normal times.
Fees have recently become erratic due to the fad of listing shitcoins and jpegs. This DDos attack literally involves turning transactions into casino chips.
This results in a premature increase in costs which leads us to speak of “utxo consolidation”. It is crucial to understand what a UTXO is to avoid unpleasant surprises if you are used to making small transactions to your wallet.
Every time you receive BTC, you receive a packet of “satoshis”. 1 bitcoin = 100,000,000 satoshis.
In the jargon, we call these packages UTXOs. In essence, it is a piece of code that mathematically links (asymmetric cryptography) a quantity of bitcoins to a bitcoin address.
If you receive two transactions, one for 0.01 BTC and another for 0.02 BTC, your wallet will simply show a balance of 0.03 BTC. But under the hood, your wallet contains two distinct UTXOs.
However, wallets very often have an option allowing you to see these UTXOs.
Bitcoin UTXO
Transaction fees are the same regardless of the amounts transferred. The price is the same to send 0.01 BTC or 10,000 BTC. What matters is the amount of data added to the blockchain.
However, a transaction can include several UTXOs. Wallets are sometimes forced to add several UTXOs to reach the amount you wish to transfer.
A wallet containing 10 UTXOs of 0.1 BTC will have to consume them all to send 1 BTC. However, the more UTXOs a transaction contains, the more it will cost in fees.
Example with two transactions assuming the fees are around 80 satoshis per vbyte. (We are talking about vbytes [octet virtuel] from the SegWit soft fork)
-A transaction using a single UTXOs currently costs 10,700 sats, or ~$4.60.
-A transaction of 80 UTXOs costs 635,000 sats, or ~$275.
Use the site mempool.space/en/ to monitor the evolution of transaction fees:
Clearly, if transaction fees were to increase significantly in the future, some UTXOs would no longer be worth spending due to transaction fees being too high.
Let’s say it again. Transaction fees can cost more than the value of a UTXO…
Hence the interest in taking advantage of periods of low fees to consolidate several small UTXOs into one in order to save yourself significant fees later. Especially since it is certain that the costs will increase as the number of users increases.
To avoid this pitfall (unusable UTXOs), it is worth avoiding withdrawing too small amounts from exchanges to your wallet.
Good practices
If possible, you should not transfer amounts less than 0.01 bitcoin (~400 euros) to your wallet. Collecting large UTXOs instead ensures much more flexibility in the event of perpetually rising transaction fees.
If you have less than 0.01 BTC, it is better to leave it on your exchange to avoid future fees. Wait until you have accumulated at least 0.01 BTC, or even 0.02 BTC.
Having small UTXOs will end up causing very big problems for their owners. If you have made the mistake of amassing a multitude of small UTXOs, take advantage of periods of low fees to consolidate them.
To consolidate, follow these steps:
1) Create a new address in your wallet.
2) Send several small UTXOs to this address to consolidate them into one of a larger amount.
But beware. Each UTXO can be tracked and traced… Consolidation always results in a loss of anonymity.
Imagine you received a UTXO from an exchange. If you consolidate it with others, the exchange will assume that they all belong to you.
Imagine you received 10 payments of 0.1 BTC from 10 different people. So you have 10 UTXOs. None of these people are aware of the other 9 payments, nor the balance of your wallet.
But if you consolidate the utxos, each person will be able to know that:
- You had (at least) 1 BTC in your wallet
- You received these 9 other payments of 0.1 BTC each
Furthermore, anyone you send bitcoins to will also know that you had (at least) 1 BTC consolidated through 10 different transactions.
To learn more about how to stay anonymous, don’t miss our latest articles on Coinjoins:
-Bitcoin Coinjoin – How does it work?
-Bitcoin – What is the cheapest CoinJoin?
In short, it is important to know what a UTXO is. Prefer to use a wallet that allows you to label them according to their origin (Sparrow, Trezor, Wasabi, etc.) so as not to consolidate “snitch” UTXOs.
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