UTXO Consolidation
Combining many small unspent transaction outputs into fewer, larger ones, typically to reduce the fee overhead of spending them individually later.
UTXO consolidation is the practice of combining many small unspent transaction outputs (UTXOs, see Kaavon's "UTXO" glossary definition) into a single transaction that merges them into one larger UTXO. Since each input a transaction spends adds to its overall data size and therefore its fee, a wallet or address holding many small, scattered UTXOs will pay proportionally more in fees whenever it eventually needs to spend several of them together in a future transaction.
Consolidation is typically done deliberately during periods of low network fees, since the transaction merging many inputs is itself larger and costs more at that moment, trading a one-time consolidation cost for lower fees on future spends. The main tradeoff to weigh against doing this is privacy: consolidating UTXOs that were previously separate, including ones from different sources, directly links them together on-chain, which coin control (see Kaavon's "Coin Control" glossary definition) practices are specifically designed to avoid.
Examples
- A service that pays out many small UTXOs to the same address over time might consolidate them during a low-fee period to reduce costs on a future large withdrawal.
- UTXO consolidation directly links previously separate outputs on-chain, which is the opposite of what privacy-focused coin control practices try to achieve.