UTXO (Unspent Transaction Output) consolidation in Bitcoin is the process of combining multiple small UTXOs into a single, larger one. This helps reduce the number of inputs needed for future transactions, which can lower transaction fees and improve efficiency.

Here’s a simple way to understand it:

Imagine you have a wallet with many small coins (UTXOs), like having multiple $1 bills instead of a single $10 bill. When fees are low, you can combine these small amounts into a larger, single UTXO. Later, when you want to spend Bitcoin, you’ll need fewer inputs, making the transaction cheaper and faster.

This is especially useful when transaction fees are high, as fewer inputs mean lower fees. Many Bitcoin users and businesses perform UTXO consolidation when network fees are low to optimize future spending.