Often a question like this is asked about bitcoin: I have several very small UTXOs which are not very usable. Can I merge them in order to have a coin that i can use more easily? Small UTXOs are money too and i would not like to lose them. How can this problem be tackled?
To be able to answer this question, a premise must be made. Consolidating small UTXO is something that has both positive and negative implications that must be considered. Below we examine the pros and cons of this operation, but it is then up to us to decide whether or not it is an activity that is applicable to our profile and risk attitude.
As a small recap, a UTXO is a spendable bitcoin “coin” in our wallet, which we can use as input for a payment transaction we want to make. As a concept it resembles a banknote. That is, a “piece” of money that we can use to pay and that, once used, in many cases provides for a return change as it must be spent in full and cannot be “divided”.
Negative aspects of consolidation
The negative aspects mainly concern the impact on our privacy. In fact when I perform the consolidation transaction, a chainanalysys agency that is scanning the blockchain can heuristically determine that those addresses are probably controlled by the same private key and therefore are from the same person.
We may not realize it but the set of bitcoin transactions, is constantly analyzed and monitored by agencies whose job it is to attribute identities to addresses and see how the various transactions are related to each other. Although bitcoin, as we know, is pseudonymous, these agencies work precisely to minimize the anonymity of the network and to capture information about the funds in circulation.
For the reasons stated, the change of a transaction carries information about us and should therefore be ‘handled’ with care.
Furthermore, if any of those addresses (whose funds we are trying to consolidate) have been associated with one’s identity through an exchange kyc or a web publication, it will be possible to associate the consolidated addresses as well as the resulting one with one’s identity and this will also have an impact on subsequent transactions. This scenario is not only worrisome but also not very unlikely.
Positive aspects of consolidation
The positive aspects. If I take advantage of a very low fee moment, I can create a transaction that spends all the small UTXOs to an address of mine (i.e. an address created within my wallet where I have the private keys). This transaction will be very large in terms of size (as it involves several inputs) and so I will take advantage of a low network fee moment, to minimize the total amount of fees. It will therefore be a transaction with multiple inputs and only one output. The output will obviously be built without change and will become a UTXO in our wallet ready for future spending.
At the end of the transaction, I will obtain a single UTXO, with a value equal to the sum of the previous inputs minus the total transaction fees, which will be consequently more easily spendable with a future transaction smaller in size and therefore not excessively expensive, even if the cost of the fees at that time was higher. Moreover I have also obtained the advantage of optimizing my UTXO set with all the enhancements that his makes possible.
It is therefore advisable to always evaluate if the positive or negative aspects prevail in your specific case and in the case of the utxo we want to use.
Buying bitcoins outside of centralised exchangers is always a better solution as it preserves our privacy better and this is one of our rights.