An analysis of Bitcoin UTXO consolidation

Bitcoin employs the unspent transaction output (UTXO) model for keeping track of asset ownership in its network. All transactions made on Bitcoin have an input that references a previous unspent output. When users want to transfer bitcoins, their wallet adds up a set of unspent outputs as inputs to construct a transaction. These unspent outputs are considered “spent” when they are referenced in a new transaction. Each UTXO, in theory, could include an unlimited number of bitcoins.

While each transaction must include one input and one output, they could theoretically have an unlimited number of inputs and outputs. We’ve previously covered batching, in which users create transactions with multiple outputs and a smaller set of inputs to save transaction fees. This time we take a look at UTXO consolidation, where users merge sets of small UTXOs to create larger ones. This is done to decrease the size of a wallet’s UTXO set and prevent their UTXOs from turning into dust.