Last updated: June 2024 / 847922 o'block
UTXO consolidation is a relatively simple process of sending bitcoin to your own address, intended to turn a bigger number of small UTXOs into a smaller number large UTXOs in order to lower the fees of future transactions. At its simplest, UTXO consolidation is just sending the entire balance of your Bitcoin wallet to an address in that same wallet.
It's like when, with traditional money, sometimes you end up with a wallet full of smaller coins or small paper bills and you exchange them for larger paper bills for easier handling.
Transaction processing fees are based on the size of the transaction (in bytes). Each UTXO input adds to the size of the transaction. If your wallet has many small UTXOs and/or you want to send/spend bitcoin at a time when fees are high, the fee for your transaction will be bigger. To help lower the fees, you can do UTXO consolidation at a time when fees are lower (for instance: during a weekend, late at night, late in the summer) and when you are not in a hurry with the transaction and don't mind waiting a few Bitcoin blocks for your transaction to be processed. Now your UTXOs are larger and when you need to spend them next, your fees will be lower, even if you are in a hurry and don't want to wait for a more friendly fee environment.
You should only be sending to new address types - Native Segwit, starting with bc1 - as transactions from these addresses can be half the cost as when using legacy addresses.
UTXO consolidation is worthwhile if you receive a lot of smaller transactions into your wallet (many small payments, or you acquire your bitcoin using dollar-cost-averaging). You don't want to end up stuck with hundreds of small transactions with UTXOs so small that spending them wouldn't make sense because the fee for the transaction would be too high.
If you are an advanced user or looking to learn, it's a good idea to use a wallet with coin control (for instance, Sparrow wallet https://sparrowwallet.com/ or Electrum https://electrum.org ). That way you can see which of your UTXOs should be sent together and consolidated. Companies that do chain analysis (trace the ownership of bitcoin across transactions on-chain) often use the common-input-ownership heuristic - assumption that UTXOs that are spent together are owned by the same person or entity. In some situations you may want to avoid combining sats from different sources, as this may reveal information about yourself (for example: if you are combining KYC and non KYC sats) and other people (for example: who are the buyers of your product/service).
Mempool and blockchain explorer: https://mempool.space/
For lower fees, look under Transaction Fees -> Medium or Low Priority. To avoid your transaction getting stuck in the mempool or purged from it, be sure to set your fee rate above the Purging level.
Mempool statistics: https://jochen-hoenicke.de/queue/#BTC,1w,weight
If I send two (or more) transactions to the same bitcoin address, are those two separate UTXOs or only one?
Answer: Those will be two (or more) UTXOs. Each transaction will create a distinct UTXO.
A Bitcoin address and a UTXO are different things. You can think of a UTXO as an individual bundle of sats, and a Bitcoin address is the location where that bundle is stored. A single Bitcoin address can have no UTXOs in it, or one, or many. A UTXO is always in a single Bitcoin address.
Do I need to create a new Bitcoin wallet to be able to consolidate UTXOs?
Answer: No. You can send your consolidation transaction to your existing wallet. Yes, you will be sending from the wallet into that same wallet - much like, in a physical world, exchanging a bunch of small money bills for one big money bill and putting it right back into your wallet.
What is bitcoin dust?
Answer: dust or stranded sats are UTXOs that are so small that it doesn't make sense to spend them as the costs of the transaction would be larger than the amount left from the UTXO.
What amount exactly would be considered dust depends on the current level of fees on the network. When the fee rates fall, some of your dust may become spendable again. If the fee rates rise - and with the current state of teh Bitcion network, it is reasonable to expect them to gradually rise over time - some of your UTXOs may become dust unless you consolidate them when the fees allow for it.
What is a good minimum amount of bitcoin to have in a UTXO for long-term storage?
Answer: at the time of writing, 0.005 btc is a good size UTXO for long-term storage. (Keep in mind this may change depending on the development of Bitcoin and how fee rates change over time.)
Graphical abstract: for when you just need a quick overview or reminder - same stuff as above, just all in one image.
