UTXO Consolidation: Maximising Your Bitcoin Wallet's Potential

The Unspent Transaction Output (UTXO) is a vital element of how transactions are conducted on the Bitcoin blockchain. It denotes the funds that are still available to spend for a specific Bitcoin address. When completing a transaction, users need to utilize Unspent Transaction Outputs (UTXOs), which can result in the accumulation of a significant number of UTXOs. Managing such a large quantity can become challenging. In this article, we will explore the process of consolidating such transaction output and offer practical advice on how to implement this consolidation using a real-world Bitcoin wallet

What is UTXO Consolidation?

When someone sends bitcoin, the process involves moving funds from different sources, called transaction inputs or UTXOs, to create a new output UTXO that represents the updated balance after the transaction. However, this approach can lead to challenges in handling funds effectively and may result in increased transaction fees when users accumulate multiple UTXOs over a period of time. To streamline the management of funds and minimise fees, a technique called UTXO consolidation can be employed. This technique involves merging multiple UTXOs into a single one, offering benefits such as improved privacy and reduced transaction size on the blockchain..

There are two primary approaches to consolidate:

1. Manual consolidation
2. Automatic consolidation

Manual Consolidation: This involves creating a new transaction with your desired UTXOs as inputs and then sending the entire amount to yourself in a single output.

Consolidating manually offers users a higher degree of control during the process. They can handpick particular UTXOs based on several factors such as age, size, and transaction fees. However, this method can be tedious and requires active management of UTXOs by the user.

Automatic Consolidation: Bitcoin wallets can merge multiple unspent transaction outputs (UTXOs) into a single output periodically. Users can set a threshold based on the number or total value of UTXOs to automatically trigger this process at regular intervals.

A Bitcoin wallet can automatically merge unspent transaction outputs based on specific conditions, like having more than 100 UTXOs or a total value exceeding 0.1 BTC. The wallet will handle the selection of the appropriate UTXOs and begin the consolidation process without requiring any action from the user

Consolidating UTXOs manually offers users greater control and visibility compared to automated consolidation, even though the latter makes it easier to handle UTXO management and decreases the chance of UTXO scattered into tiny bits that are expensive to manage.

Implementing UTXO Consolidation

To implement UTXO consolidation, we need bitcoin node implementation running on our computer. Our demonstration will center around using the bitcon-cli and btcd. These implementations provide an interface for interacting with the Bitcoin network via the JSON-RPC API. The following steps outline the process of implementing UTXO consolidation manually using bitcoin-cli:

1. Determine the UTXOs to Consolidate: The first step involves searching the network for all UTXOs linked to a particular address. One way to do this is by utilising the listunspent command via bitcoin-cli, which provides a list of UTXOs linked to a given address. For instance, to obtain a list of all unspent transaction outputs connected to the address tb1qreze397npdx93rdqzmjhclc2qk3d9x9vc8ylm6, use the following command:

bitcoin-cli listunspent 0 999999 "[\"tb1qreze397npdx93rdqzmjhclc2qk3d9x9vc8ylm6\"]"

When you use this command, you'll receive a comprehensive list of all UTXOs linked to the provided address that haven't been spent yet.

1. Determine the overall worth of UTXOs

After identifying the UTXOs to merge, the subsequent crucial phase is to compute their overall value. It's important to make sure there are enough funds to cover the transaction fee when consolidating. To calculate the total value of UTXOs, simply add up the value of each transaction output listed in Step 1.

1. Create a Transaction with Consolidated UTXOs

After identifying the UTXOs to consolidate and totaling their value, the next step is to generate a new transaction that merges them into one UTXO. The command createrawtransaction can be used to accomplish this. For instance, if you want to consolidate two UTXOs linked to the address tb1qreze397npdx93rdqzmjhclc2qk3d9x9vc8ylm6, use the command below:

bitcoin-cli createrawtransaction '[{"txid":"<id1>","vout":<number1>},{"txid":"<id2>","vout":<number2>}}]'

1. Sign the Transaction

After creating a new transaction, the subsequent step involves signing it with the private key linked to the address holding the UTXOs. To sign, you can employ the signrawtransactionwithwallet command. For instance, if you want to sign the transaction generated in Step 3, use the subsequent command.

bitcoin-cli signrawtransactionwithwallet <rawtransaction>

This command will sign the transaction with the private key associated with the address that holds the UTXOs.

1. Broadcast the Transaction:

After the transaction has been signed, the last step is to send it to the Bitcoin network by executing the sendrawtransaction command to broadcast the transaction made in Step 4:

bitcoin-cli sendrawtransaction <signedtransaction>

Once executed, the transaction will be disseminated throughout the Bitcoin network, and upon confirmation, the Unspent Transaction Outputs will merge into a solitary UTXO.

Below are the steps to implement automatic UTXO consolidation using the btcd package in Golang. Although these steps can be applied to any programming language supporting Bitcoin node implementation, we will focus on Golang's btcd for this example:

package main

import (
    "fmt"
    "log"
    "os"
    "os/signal"
    "syscall"
    "time"

    "github.com/btcsuite/btcd/chaincfg"
    "github.com/btcsuite/btcd/rpcclient"
)

const (
    rpcUser     = "your_rpc_username"
    rpcPassword = "your_rpc_password"
    rpcHost     = "localhost"
    rpcPort     = "8332"
)

func main() {
    // Connect to the Bitcoin node
    connCfg := &rpcclient.ConnConfig{
        Host:         rpcHost + ":" + rpcPort,
        User:         rpcUser,
        Pass:         rpcPassword,
        HTTPPostMode: true,
        DisableTLS:   true,
    }
    client, err := rpcclient.New(connCfg, &chaincfg.MainNetParams)
    if err != nil {
        log.Fatal(err)
    }
    defer client.Shutdown()

    // Configure consolidation threshold
    consolidationThreshold := 100 // Number of UTXOs or total UTXO value threshold

    // Start the consolidation process
    go consolidateUTXOs(client, consolidationThreshold)

    // Wait for interrupt signal to gracefully exit
    waitForExitSignal()
}

func consolidateUTXOs(client *rpcclient.Client, threshold int) {
    for {
        // Retrieve UTXOs from the wallet
        unspentList, err := client.ListUnspentMinMaxAddresses(0, threshold, nil, nil)
        if err != nil {
            log.Println("Error retrieving UTXOs:", err)
            continue
        }

        // Check if consolidation is necessary
        if len(unspentList) >= threshold {
            // Create the consolidation transaction
            txInputs := make([]rpcclient.TransactionInput, 0)
            totalValue := float64(0)
            for _, utxo := range unspentList {
                txInputs = append(txInputs, rpcclient.TransactionInput{
                    Txid: utxo.TxID,
                    Vout: utxo.Vout,
                })
                totalValue += utxo.Amount
            }
            txOutput := make(map[string]float64)
            txOutput["your_destination_address"] = totalValue

            consolidationTxID, err := client.CreateRawTransaction(txInputs, txOutput)
            if err != nil {
                log.Println("Error creating consolidation transaction:", err)
                continue
            }

            // Sign and send the consolidation transaction
            signedTx, err := client.SignRawTransaction(consolidationTxID)
            if err != nil {
                log.Println("Error signing consolidation transaction:", err)
                continue
            }

            txHash, err := client.SendRawTransaction(signedTx.Hex, true)
            if err != nil {
                log.Println("Error sending consolidation transaction:", err)
                continue
            }

            log.Printf("Consolidation transaction sent, TxID: %s\n", txHash)
        }

        // Wait for some time before checking again
        time.Sleep(10 * time.Minute)
    }
}

func waitForExitSignal() {
    interruptChannel := make(chan os.Signal, 1)
    signal.Notify(interruptChannel, os.Interrupt, syscall.SIGTERM)
    <-interruptChannel
    fmt.Println("Exiting...")
    os.Exit(0)
}

Conclusion

UTXO consolidation is a useful process that can bring various benefits to Bitcoin users. When users merge several UTXOs into one transaction output, it reduces the number of inputs needed for a transaction, leading to faster transaction times and reduced transaction fees and improves privacy. Consolidating UTXOs also simplifies Bitcoin holdings management for users