𝗦𝗮𝘃𝗲 𝗦𝗮𝘁𝘀 & 𝗜𝗻𝗰𝗿𝗲𝗮𝘀𝗲 𝗣𝗿𝗶𝘃𝗮𝗰𝘆 𝗮𝘁 𝘁𝗵𝗲 𝘀𝗮𝗺𝗲 𝘁𝗶𝗺𝗲???

𝗬𝗲𝘀…

𝗪𝗶𝘁𝗵 𝙐𝙏𝙓𝙊 𝙈𝙖𝙣𝙖𝙜𝙚𝙢𝙚𝙣𝙩

You’ve probably heard of UTXOs, but what exactly are they? And why do they need to be managed?

I’ll answer both questions, and point you to some easy-to-use tools that can help you, because 𝘮𝘢𝘯𝘢𝘨𝘪𝘯𝘨 𝘜𝘛𝘟𝘖𝘴 𝘴𝘩𝘰𝘶𝘭𝘥𝘯’𝘵 𝘰𝘯𝘭𝘺 𝘧𝘰𝘳 𝘵𝘩𝘦 𝘩𝘪𝘨𝘩𝘭𝘺 𝘵𝘦𝘤𝘩𝘯𝘪𝘤𝘢𝘭.

Let’s get started ⬇️

𝗪𝗵𝗮𝘁 𝗔𝗿𝗲 𝗨𝗧𝗫𝗢𝘀?

Think of Unspent Transaction Outputs, or UTXOs, as bundles of sats. In the dollar system, the equivalent would be bundles of cents, represented by coins or notes. With the USD, you have 12 possible types of UTXOs, or bundles: 1¢, 5¢, 10¢, 25¢, 50¢, $1, $2 (rarely), and all the way through to $5, $10, $20, $50, and $100. 💵

The difference with #Bitcoin, is 𝘢𝘯𝘺 𝘯𝘶𝘮𝘣𝘦𝘳 𝘰𝘧 𝘴𝘢𝘵𝘴 can be merged together into a single UTXO. So instead of just 12, there’s practically an unlimited number.

They are called Unspent Transaction 𝘖𝘶𝘵𝘱𝘶𝘵𝘴 because every on-chain Bitcoin transaction has 𝘪𝘯𝘱𝘶𝘵𝘴 (the sats being sent by the payer) and 𝘰𝘶𝘵𝘱𝘶𝘵𝘴 (the sats being received by the payee, and the sats being returned as change to the payer). The amount of bitcoin you see in your wallet is simply the sum of all the UTXOs linked to your private key.

𝗪𝗵𝘆 𝗠𝗮𝗻𝗮𝗴𝗲 𝗬𝗼𝘂𝗿 𝗨𝗧𝗫𝗢𝘀?

There’s a few reasons.

First of all, properly managing your UTXOs can save you on-chain fees because every UTXO involved in a transaction adds more data to it. This costs money (sats) because block space is limited, and the more your transaction “weighs”, the more you need to pay miners to include your transaction in the next block.

Consider these real-life examples:

In the first example, notice how 8 UTXOs are used for the transaction, compared to just 1 in the second. Even though their fee rates were almost the same, the total fee for the first example is much greater than the second. This is because the “weight” of the first transaction is greater.

So, the lesson?

𝘊𝘰𝘯𝘴𝘰𝘭𝘪𝘥𝘢𝘵𝘪𝘯𝘨 𝘺𝘰𝘶𝘳 𝘜𝘛𝘟𝘖𝘴, 𝘢𝘯𝘥 𝘤𝘢𝘳𝘦𝘧𝘶𝘭𝘭𝘺 𝘶𝘴𝘪𝘯𝘨 𝘵𝘩𝘦 𝘰𝘯𝘦𝘴 𝘵𝘩𝘢𝘵 𝘣𝘦𝘴𝘵 𝘢𝘥𝘥 𝘶𝘱 𝘵𝘰 𝘵𝘩𝘦 𝘢𝘮𝘰𝘶𝘯𝘵 𝘺𝘰𝘶 𝘯𝘦𝘦𝘥 𝘵𝘰 𝘴𝘱𝘦𝘯𝘥, 𝘤𝘢𝘯 𝘤𝘰𝘯𝘴𝘦𝘳𝘷𝘦 𝘵𝘩𝘦 𝘢𝘮𝘰𝘶𝘯𝘵 𝘰𝘧 𝘰𝘯-𝘤𝘩𝘢𝘪𝘯 𝘥𝘢𝘵𝘢 𝘣𝘦𝘪𝘯𝘨 𝘶𝘴𝘦𝘥 𝘪𝘯 𝘢 𝘵𝘳𝘢𝘯𝘴𝘢𝘤𝘵𝘪𝘰𝘯, 𝘢𝘯𝘥 𝘵𝘩𝘦𝘳𝘦𝘧𝘰𝘳𝘦 𝘢𝘭𝘴𝘰 𝘴𝘢𝘷𝘦 𝘺𝘰𝘶 𝘰𝘯 𝘧𝘦𝘦𝘴. 😎

𝗛𝗼𝘄 𝗮𝗯𝗼𝘂𝘁 𝗣𝗿𝗶𝘃𝗮𝗰𝘆?

UTXO management (or lack thereof) can either help or hinder your privacy, so it’s important to be careful, and understand what you’re doing.

Prior to UTXO consolidation, it can be difficult — or even impossible — for a person or program to prove that 2 or more UTXOs belong to the same person, but once you’ve combined UTXOs, it’s easier to link them together.

To illustrate this point, let’s assume you have a UTXO that you acquired from a KYC’d exchange, and another that you received by selling something at a yard sale. Because you were responsible and used a different receiving address each time, no one would be able to verify that they’re connected to the same user.

However, if those UTXOs are ever used in the same transaction, someone monitoring those addressed on the blockchain may be able to deduce that they belonged to the same person. That won’t tell them 𝘦𝘷𝘦𝘳𝘺𝘵𝘩𝘪𝘯𝘨 about their ownership, but it will give them valuable clues about your on-chain activity. 🕵️

Not everyone is concerned by this lack of privacy, but if you are, then you’ll need to choose your UTXOs very carefully when consolidating or spending them. Doing so can actually 𝘦𝘯𝘩𝘢𝘯𝘤𝘦 your privacy, rather than harm it.

𝗠𝗮𝗻𝗮𝗴𝗶𝗻𝗴 𝗬𝗼𝘂𝗿 𝗨𝗧𝗫𝗢𝘀

Consolidating your UTXOs is as easy as sending them to yourself, and the best time to do so is when the mempool — the pool of pending transactions — is low. The amount of data in your transaction will be high, of course, but when there is low demand on chain, and you’re only paying a few sats per vbyte, your total fee should be reasonable and you’ll be in a better position for future transactions, and for when there is more demand for bitcoin block space (ie; when the mempool is full).

There are several wallets that let you view and manage your UTXOs when spending or consolidating them, including Sparrow Wallet, Electrum Wallet, and Blue Wallet. These allow you to select your UTXOs and pay the lowest fees possible, thus leaving more blockspace for other transactions (they often do this automatically, but no algorithm is perfect).

In the end, managing your UTXO set is a bit of art and a bit of science that requires conscious effort, and the lower fees and privacy benefits from 𝘱𝘳𝘰𝘱𝘦𝘳 UTXO management can make it worth it.

A special thank you to nostr:npub1t289s8ck5qfwynf2vsq49t2kypvvkpj7rhegayrur0ag9s2sezaqgunkzs for bringing this topic to my attention! 🙏

Be sure to 𝗯𝗼𝗼𝗸𝗺𝗮𝗿𝗸🔖 this, to refer to when you need to manage your UTXOs.

𝗥𝗲𝗽𝗼𝘀𝘁 and share it so that more people also learn about UTXO management.

And if you’d like to share 𝘺𝘰𝘶𝘳 thoughts on this, drop them in the 𝗰𝗼𝗺𝗺𝗲𝗻𝘁𝘀.👇