Thread by @unchainedcap

1/ You’re not alone if you’re tempted to shy away from learning about something called a “UTXO”... and it probably doesn’t help that UTXO is an abbreviation for “unspent transaction output.” In this thread, we’ll walk through what #bitcoin UTXOs are and why they matter 🧵

2/ The world of traditional finance can provide us with great analogies for understanding how bitcoin operates. To help explain the role that UTXOs play, let’s start with two different mental models for storing cash: a bank account and a piggy bank.

3/ A bank mixes your cash with their other customers' cash, and you can withdraw cash in any denomination you choose from that larger pile. However, when you put cash in a piggy bank, the bills remain in specific denominations. When you withdraw, you have to choose your bills.

4/ Having an exchange hold your bitcoin for you is similar to having a bank hold your cash. The exchange mixes everyone’s bitcoin together, and you don’t have to think about the denominations. However, this is not true for a bitcoin wallet you control.

5/ For your own wallet, it’s better to think about the piggy bank model. Every time you make a deposit, that deposit is stored separately as its own entity, similar to dropping a new dollar bill in your piggy bank. In bitcoin, each of these deposits (bills) is called a UTXO.

6/ If your self-custody wallet holds 0.9 BTC, it makes a fundamental difference whether you deposited that amount all at once, or you made several smaller deposits that total that amount. The difference is that your wallet will contain either one UTXO or several.

7/ If it’s all the same total, does it really matter? It certainly does—just like it matters whether you store a single $100 bill in your piggy bank or a hundred $1 bills! In fact, your UTXO count can affect your privacy, as well as your costs to move the bitcoin in the future!

8/ Let’s take a closer look at privacy. If you only have one UTXO of 0.9 BTC, then sending someone 0.2 BTC will also require sending change back to yourself (0.7 BTC). This action of sending change back to yourself reveals information about your wallet balance.

9/ Meanwhile, if your bitcoin exists in smaller chunks, such as nine UTXOs of 0.1 BTC each, then you are less likely to reveal sizable quantities of your bitcoin wallet by sending large amounts of change back to yourself.

10/ However, there is a cost to keeping your bitcoin in the form of many small UTXOs. When it comes time to move your bitcoin out of your wallet, transactions using a lot of UTXOs are “heavier” (use more data) and incur higher transaction fees.

11/ By storing your bitcoin with fewer UTXOs of higher denomination, there will typically be less “weight” (data) when you move the bitcoin in the future, and it will cost you less.

12/ When using a self-custody or collaborative custody wallet, and therefore managing your own UTXOs, it is important to be mindful of your privacy and your future costs. There are tradeoffs to having larger UTXOs versus smaller UTXOs.

13/ To manage your UTXOs, there are a few main techniques you can use:
1. Control your deposit frequency.
2. Perform a UTXO consolidation.
3. Perform a CoinJoin.

14/ Controlling your deposits: If you buy bitcoin on an exchange every single day and then immediately send it to your wallet, you will end up with one new UTXO each day. If you let the bitcoin build up and send to your wallet in larger chunks, you will have fewer UTXOs.

15/ UTXO consolidations: If you have a lot of small UTXOs, you can pull them together and send them back to yourself, effectively combining them into one UTXO. This may lower your future costs, but can also reduce your privacy.

16/ CoinJoins: If UTXOs have potentially been exposed as belonging to you, there are still things you can do to regain some anonymity. By coordinating with other parties, UTXOs can be mixed together multiple times, becoming difficult to track.

17/ If you want to further expand your understanding of UTXOs, why they matter, and the basics of UTXO management, be sure to read the full article by @tom_honzik: unchained.com/blog/what-is-a…

18/ Whether you hold your bitcoin entirely by yourself or choose to use a collaborative custody model like an Unchained #multisig vault, UTXO management is just one more layer of knowledge to be gained as you go on your way to bitcoin self-sovereignty.

end/ Ready to get started with multisig? Our Concierge team is here to help you hold your own keys while eliminating all single points of failure: unchained.com/concierge/