Can anyone explain to me why I want to consolidate UTXOs? Genuine question. I understand UTXOs, just not the full concept of managing them a certain way.
Discussion
Also curious
My understanding is utxo is like bills so if you have a lot of utxo you have a lot of bills and when you make a transaction the fee will be higher because you need to pull more bills together to make the amount that you want to transact with.. so if you consolidate your utxos to larger amounts and less your fees will be way less.. if someone else can add of correct if I'm wrong because I'm learning this now lol 😆
The fear that it might cost too much to send an on chain transaction in the future than what a UTXO is worth. Like would you send $10 if it cost $100 to do so? This is a hypothetical situation though. No one knows how the fees will look like that far into the future.
This is not exactly solved if you have a larger UTXO since you will still pay the same amount in fee. Higher fees make sending lower balances not worthwhile regardless of the size of the UTXO you use as an input. That said having less inputs will lower the total fee. The way I see it the main concern when having smaller utxos is losing privacy if you need to combine them. Also for accounting purposes it’s better to have less UTXOs, imagine having 40 $1 bills in your wallet.
The more UTXOs you use as inputs the more you will pay in fees. Having larger UTXOs helps minimize the size of the txn and thus the fee you pay. There’s more nuance to how what size UTXOs you want to have, but a main consideration is managing txn fees
Another thing to keep in mind is that if you have to combine multiple UTXOs to make a txn, this can reduce your privacy. Say if you mix KYCd UTXOs with non-KYC UTXOs
Okay. I didn’t know about the few part of it, I thought it was more centered around privacy. But at the same time, I thought that consolidating UTXOs was what actually hurts potential privacy. But what you said makes sense.
What happens though if you minimize your UTXOs and end up mixing KYC and nonKYC into one? Does that compromise the entire UTXO to be KYCd? Or am I missing something there?
yes
How would one alleviate this? Mix each UTXO when managing?
keep the kyc & non separate through coin control & labelling. make sure to consider the tradeoffs of consolidation and also larger and smaller outputs when mixing. consider how you manage your toxic change as well.
if you coinjoin you‘re actually better off with many small amounts of bitcoin, for greater anonymity sets, harder to say definitively who owns them. the larger the utxo the smaller the pool of possible owners
What’s the best mix size? 100k sats?
Well that depends on if you currently spend bitcoin or if you’re stacking. For everyday use 100k is a good size, but imo it’s a bit small for stacking. I would personally consolidate into utxos of at least 1M sats. This number may be different for everyone depending on your means, but my thinking is that it will become increasingly difficult to stack larger UTXOs (relative) in the future when price goes up, so might as well stack those larger UTXOs now when you can. Also if you’re going to be stacking or earning bitcoin for a long time, you can quickly end up with a lot of UTXOs you need to manage
Nice. Thanks for that info.
Sparrow makes all of this very easy to implement.
Yep, but unless you’re a baller most likely your UTXO set won’t stand out in the crowd. I would keep them at least 1M sats for stacking. There will be plenty of time to earn or buy smaller UTXOs in the future when number go up
fee* part of it 
Consolidating UTXOs can hurt your privacy, but you’re sending the UTXO to yourself so someone would have to be actively tracking vs if you spend the combined UTXOs then the person that received might know who you are and can see all the inputs to the txn and make assumptions or infer certain things from it.
I like using joinmarket when combining UTXOs either for spending or consolidating, but you can use whirlpool or wabisabi to gain or keep your privacy.
You’ll pay more in fees if you send a tx that is made up of a higher number of utxo’s.
Ie. Say you buy something for 10,000 sats. It’ll cost less in fees if that tx is sent containing 2 utxo’s of 5000 sats than 10 utxo’s of 1000 sats.
It’s generally smart to consolidate utxo’s when the mempool is empty and fees are low.
The only reason i can think of to consolidate is because youre concerned about tx fees in the future. Maybe also to clean up a wallet with tons of utxos. Of course if you have a small enough utxo, you may not be able to move it when fees are high. Definite potential privacy concerns to consolidation. Everyone will know those consolidated utxos were controlled by the same person.
Since we pay for block space, not the value of the transaction, when you have many utxo inputs for a transaction, that literally adds data to the size of the transaction (multiple inputs is more information to relay than one input, for example), which makes the transaction more expensive overall.
Consolidating small UTXOs should be done when transaction fees are low so that your transactions use the least amount of inputs necessary for your payments whenever transaction fees are high.
To preserve your privacy when consolidating, you can prevent revealing multiple UTXOs belong to you by combining them within a WabiSabi coinjoin (available in Wasabi Wallet, Trezor, and BTCPay Server).