Thread by @JohnCantrell97

We learned yesterday that when you own Bitcoin, you control keys that can spend UTXOs. In case you missed it:

https://twitter.com/JohnCantrell97/status/1480979605414723585

Let me explain how with proper UTXO management you can save money and maintain your privacy 👇

How can learning to manage your UTXOs help you save money?

Well if you remember from this thread:

https://twitter.com/JohnCantrell97/status/1479905430000316420

We learned that the cost to send Bitcoin is proportional to the size of the tx and that the size of the tx depends on the size of the inputs and outputs.

The UTXOs we control are used as inputs for all txs that we make. This gives us control over the size of our tx.

When picking inputs to use we need to make sure the total amount in is >= the total amount going out. We can save money by minimizing the number of inputs we use.

For example, if we are trying to send 50,000 sats and we have UTXOs with the following amounts: 12K, 15K, 25K, and 51K.

We could create this transaction using 3 inputs (12K+15K+25K >= 50K) or we could use 1 input (51K > 50K).

Using 1 input will be much cheaper than using 3.

The other way we can save money is if we remember that segwit transactions get a 25% discount on fees. This depends on what inputs you use in your transaction.

If you have segwit inputs to spend then you will be able to take advantage of this discount.

Make sure you use a wallet that generates native segwit receive addresses (they start with bc1). This will ensure that you will always get the 25% fee discount when you make transactions.

Luckily, as of 2022, almost all wallets will offer you this functionality.

So how can UTXO management help maintain your privacy?

Every transaction on the blockchain is publicly visible.

This means everyone can see every UTXO that is spent and where it is sent to. This includes a full history of everywhere it has been and everywhere it will go.

This means privacy is hard to come by so you need to do everything you can to maintain it. You do this by being careful about the UTXO’s you use in a tx.

When you spend multiple UTXOs in a tx you are broadcasting to everyone that all of these UTXOs belong to the same person.

For example, imagine you bought some Bitcoin from exchange ABC where you had to provide personal identifying information.

When you withdraw your coins from this exchange, they know exactly who owns those UTXOs and can track every tx that you make with them.

You might have other separate sets of UTXOs from other exchanges, selling goods/services, or mining. Exchange ABC doesn’t know these UTXO’s are yours.

However, if you make a tx that spends UTXOs from the set they know is yours and from one of these other sets then..

…they can be pretty sure that you also own those other UTXO’s and can add them to the list of UTXOs they know you control.

So how can you avoid this?

Make sure your wallet lets you label every single UTXO you own. Label them by describing where they came from.

If you know where each UTXO came from then when you construct txs you can make sure to never combine UTXOs from different groups.

This is great to make sure you don’t lose privacy by allowing companies to learn about all of the UTXOs you own.

What about gaining privacy?

One tactic to gain privacy is called a coinjoin. This is when you create a single tx that spends UTXOs from multiple people and redistributes them amongst the group.

This breaks the assumption that all UTXOs used in a tx are from the same person but is a topic for another day

To summarize, in order to save money and help maintain your privacy you need to make sure your wallet lets you:

- control which UTXOs are used in a tx.
- Label your UTXOs so you don’t cross-contaminate sets.
- Use segwit receive addresses (bc1) to help you save on fees.

I hope this helped you understand how you can save some money and maintain your privacy by managing your UTXOs more carefully.

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