So I’ve been seeing a lot of people talk about UTXO management and consolidating UTXOs and I have no idea what any of this is. Can someone please explain.
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When you spend Bitcoin, you typically have a change output (UTXO). This is because your current UTXOs likely don’t have the exact amount you’re trying to pay.
When you try to spend BTC, you use one or more of your UTXOs and create a payment output and a change output for yourself (based on what you overpaid).
By consolidating UTXOs, you (kind of) turn change/coins into notes, meaning less future UTXO inputs and cheaper Bitcoin transactions (as you pay per data size, and more UTXO is more data).
Other reasons include privacy motives or managing KYC/Non-KYC linked coins. Or migrating to new address types like taproot.
UTXO being an unspent transaction output.
A lightbulb went off for me when it was explained like a $100 bill. 1 UTXO. Make change and you have multiples more. Wako seems to know more words than I do though.
Can you please explain it using the $100 bill as I didn’t understand the explanation to be honest
Can you please simplify the explanation to where a five-year-old could understands it
Basically, Bitcoin creates custom notes per transaction and doesn’t use common or fixed size notes. Instead of $5, $10, $20, $50, etc, you actually hold 0.38B, 5.74B, 9.67B, 21.27B.
When you try and pay a 28.00B, you need to use two UTXO minimum (in this example) - 21.27 + 9.67 = 30.94B - 28.00B, which means 2.94B change (ignoring a mining fee).
That’s pretty typical, but pretend you only have 30 UTXOs less than 1.00B. To make the 28.00B, you. Now need 29+ UTXO inputs, which each cost extra blockchain fees (as each adds more data). Instead of 2 UTXO, you need 29+ UTXO.
If you use low mining fee times to consolidate UTXOs, the cost per UTXO can be 20-50 times less. Instead of 100 sats/vB, it can be 5-10, or less.
This makes more sense. Thank you.
Now how would one go about getting that done?
If you only want to consolidate cheaply, await a low mempool fee rate, and send all your Bitcoin to yourself in a single transaction.
Or the more complex way, you can use ‘coin control/UTXO selection’ to pick which ones to consolidate - e.g. all less than 0.0001B. Basically any that are smaller than the smallest transaction size you perform - aiming to only require a single UTXO as a transaction input instead of multiple.
I think the first way is the best for me. So I basically generate an address using my hardware wallet and then I send all my bitcoin from the hardware wallet to the address that I generated, correct?
Yep. It should result in a single UTXO output.
You may not even have a real need to consolidate to begin with. You should review your current UTXOs and their value. Fees are also fairly high atm - but always depends on your needs.
Another reason to consolidate is long term storage, if you expect fees to increase significantly in 5-10 years, so that again, you pay less in future fees.
I really appreciate this brother. May Satoshi bless you