Consolidating UTXOs and maintaining privacy

[apogio]

After a lot of thought, I decided to use a feature that Sparrow offers, in order to make my life simpler.

I have only one MultiSig (2-of-3) wallet.

My initial KYCed UTXOs are now frozen (this is the feature). So I need to unfreeze them if I want to use them. All the other UTXOs will never be combined with the KYCed ones.

[LoyceV]

I have only one MultiSig (2-of-3) wallet.

Note that multisig increases transaction fees, which is especially important when you're dealing with dust inputs.

My initial KYCed UTXOs are now frozen (this is the feature).

Many wallets can do that, I use it in Electrum and Bitcoin Core.

[apogio]

Note that multisig increases transaction fees, which is especially important when you're dealing with dust inputs.

Yes but for the time being it only has incoming transactions (apart from the first ones which I used for testing purposes).

Many wallets can do that, I use it in Electrum and Bitcoin Core.

Sure, I just didn't know about it.

[Charles-Tim]

Many wallets can do that, I use it in Electrum and Bitcoin Core.

Sure, I just didn't know about it.

Sparrow and Spectre also have coin control but I have only used it on Electrum.

Why multisig wallet? It has nothing to do with this. Instead of freezing the KYCed UTXO, I will prefer to transfer only the KYCed UTXO to a newly created wallet on another device entirely and name it KYCed UTXO which will make me not to forget about it. I will also transfer the remaining non KYC to another wallet which I will name non KYCed, using different VPN address for.

You can use multisig to increase your security, not privacy.

[apogio]

Sparrow and Spectre also has coin control but I have only used it on Electrum.

Why multisig wallet? It has nothing to do with this. Instead of freezing the KYCed UTXO, I will prefer to use coin control to transfer only the  UTXO to a newly created wallet and name it KYCed UTXO which will make me not to forget about it. I will also use coin control to transfer the remaining non KYC to another wallet which I will name non KYCed.

You can use multisig to increase your security, not privacy.

Yeap! If you read my initial post, I have said that my main savings wallet is multisig. And then I said I was thinking of creating one more wallet for KYC and one for non KYC. But, I finally decided to stick to a Multisig and follow the "freeze" option to not blend my KYCed UTXOs with the non-KYC. So, MultiSig is totally irrelevant to the privacy question, but I just said it to add more details in regards to my previous posts.

edit: If I didn't mention it anywhere in the thread, then sorry for the misunderstanding.

[o_e_l_e_o]

Instead of freezing the KYCed UTXO, I will prefer to transfer only the KYCed UTXO to a newly created wallet on another device entirely and name it KYCed UTXO which will make me not to forget about it.

I would agree with Charles-Tim here. If it is vitally important to you to not mix your KYCed and non-KYCed coins, then storing them in the same wallet and relying on the wallet freezing certain UTXOs is pretty risky. What if a simple bug in the wallet means it freezes the wrong ones? What if you lose your wallet file, have to recover from your seed phrase, and lose all your UTXO labels and which ones are frozen? What if you simply misclick and unfreeze a UTXO without realizing it? And what if you accidentally sync your wallet via a third party server, therefore revealing that all your KYCed and non-KYCed are owned by the same wallet?

I also have various subsets of coins which I would not want to mingle with each other since each subset comes from a separate source, will be spent in a separate manner, has a different anonymity set, and so on, but I keep each subset in its own wallet.

[apogio]

Instead of freezing the KYCed UTXO, I will prefer to transfer only the KYCed UTXO to a newly created wallet on another device entirely and name it KYCed UTXO which will make me not to forget about it.

I would agree with Charles-Tim here. If it is vitally important to you to not mix your KYCed and non-KYCed coins, then storing them in the same wallet and relying on the wallet freezing certain UTXOs is pretty risky. What if a simple bug in the wallet means it freezes the wrong ones? What if you lose your wallet file, have to recover from your seed phrase, and lose all your UTXO labels and which ones are frozen? What if you simply misclick and unfreeze a UTXO without realizing it? And what if you accidentally sync your wallet via a third party server, therefore revealing that all your KYCed and non-KYCed are owned by the same wallet?

I also have various subsets of coins which I would not want to mingle with each other since each subset comes from a separate source, will be spent in a separate manner, has a different anonymity set, and so on, but I keep each subset in its own wallet.

I have thought about all of that. But in the end, I don't feel like being able to take care of multiple wallets and multiple backups. I prefer simplicity. The KYCed coins are consolidated into a small amount of UTXOs, all of ~same size. It will just help me remember which ones are KYCed. Additionally, I have kept a note that the first N coins are KYCed. Finally, I don't plan to buy KYC coins anymore, so I "know" that the KYC coins are only in between the first transactions of my wallet.

[LoyceV]

Note that multisig increases transaction fees, which is especially important when you're dealing with dust inputs.

Yes but for the time being it only has incoming transactions

Planning ahead can reduce your transaction fees later on.

I prefer simplicity.

I was thinking of something like this:

[o_e_l_e_o]

But in the end, I don't feel like being able to take care of multiple wallets and multiple backups.

Well, as long as you have considered the risks and taken steps to mitigate against them, which it sounds like you have.

Just a quick point though - if the stumbling block is multiple wallets or multiple backups, then you can always just use the same seed phrase with a passphrase like "KYC" to create a new wallet which you will know is for KYCed coins only. Alternatively, you don't even need to do that and can use the same seed phrase and just increment the account number of your derivation path. So your main wallet would be at m/84'/0'/0', and your KYCed wallet would be at m/84'/0'/1'.

[apogio]

Alternatively, you don't even need to do that and can use the same seed phrase and just increment the account number of your derivation path. So your main wallet would be at m/84'/0'/0', and your KYCed wallet would be at m/84'/0'/1'.

This is a very good point. It's BIP85, right? But does it work with multisig?

[o_e_l_e_o]

It's BIP85, right?

No, that's something a bit more complicated. This is just incrementing the "account" level of the derivation path as defined in BIP44.

But does it work with multisig?

It does. To ensure that all your public keys are completely different and you don't reuse any of them across both wallets, then you would need to perform whatever action you are taking to all three of your seed phrases. So you would either need to add a passphrase to each seed phrase (it can be the same passphrase for all three if you wanted), or generate at a new derivation path for each seed phrase, and then create a new 2-of-3 multi-sig from those three new wallets.