Consolidation of mixed outputs

[DireWolfM14]

[1] Firstly, if you're looking to consolidate many small inputs, you could send everything to the mixer 1 input at a time. This way you won't link them when sending.
Next, send all the mixed, anonymous outputs to one address in one transaction.

I use Chipmixer's vouchers to join chips from different sessions, but like BlackHatCoiner said, if the change can be linked back to the wallet I use for my forum account I usually just consolidate it in one transaction.  Unfortunately I haven't had to worry about his other concern of appearing wealthy.    Any change that I may have from my IRL identity wallet I'll send in a different transaction, and consolidate the chips using vouchers.  To o_e_l_e_o's point about rounding up and the value of a chip, I usually just save the dust to consolidate with a later session.

As for exchanges and privacy (and possibly anonymity) I've been on the fence about ShapShift from the start.  They looked pretty suspicious to me at first, but I may give them a try sooner or later.  The only thing you need for an account is a seed-phrase and a password.  The app will generate a Bip39 seed which can be restored in Electrum with the appropriate derivation path, and Ethereum wallets for ETH and tokens.  You can also use MetaMask or a hardware wallet to establish and login to an account.  They don't even ask for an email address.  I haven't looked to deep into the fees or trade limits, but it seems like a viable solution for small trades.

[witcher_sense]

Hypothetical: what if someone creates a Change Consolidation Lottery? It would work like this: you go to the website, get a deposit address, send your change/dust, and the service collects it. When enough inputs are piled up, a (provably fair) lottery is drawn. Higher deposits are more likely to win of course. The winner receives the total pool (minus transaction and service fees) back to the address their deposit came from.
If enough people use it, it will be difficult to link transactions.

Personally, I have never partaken in lotteries, let alone provably-fair ones,  because both statistics and probability theory clearly shows that the chances of winning in such lotteries are rather slim. Why spend money on things that will likely turn out to be unpleasant for your person? Anyway, what problem are we trying to solve by creating a relatively random algorithm to consolidate unconnected UTXOs? If the goal of this approach is to get rid of annoying small chunks of Bitcoin clogging up the blockchain, making it a neat place for everyday transactions, then yes, I would buy that. Today there are no effective ways to clear the blockchain, especially which would also offer chances to win the jackpot for janitor job.

Can this be used as a mechanism to provide a certain level of anonymity for users that have chosen to give up some of their UTXOs for a greater good? I highly doubt it. The biggest concern is that this service is run by someone who has custody over funds. If a platform is custodial, what prevents its owners from running away with collected jackpot? If it works perfectly anonymizing all outgoing transactions, how can we catch owners that turned out to be malicious?

[NotATether]

Hypothetical: what if someone creates a Change Consolidation Lottery? It would work like this: you go to the website, get a deposit address, send your change/dust, and the service collects it. When enough inputs are piled up, a (provably fair) lottery is drawn. Higher deposits are more likely to win of course. The winner receives the total pool (minus transaction and service fees) back to the address their deposit came from.
If enough people use it, it will be difficult to link transactions.

That's actually a pretty good idea. Instead of leaving it to a centralized entity (such as a 3rd party service) or to a smart contract - which will probably get hacked anyway - this algorithm could be built directly into the Bitcoin Core codebase.

The downside of this though is that it'll make the software more like some money-making machine instead of a node for verifying bitcoin blocks & transactions (it's intended purpose).

Personally, I have never partaken in lotteries, let alone provably-fair ones,  because both statistics and probability theory clearly shows that the chances of winning in such lotteries are rather slim. Why spend money on things that will likely turn out to be unpleasant for your person? Anyway, what problem are we trying to solve by creating a relatively random algorithm to consolidate unconnected UTXOs? If the goal of this approach is to get rid of annoying small chunks of Bitcoin clogging up the blockchain, making it a neat place for everyday transactions, then yes, I would buy that. Today there are no effective ways to clear the blockchain, especially which would also offer chances to win the jackpot for janitor job.

Or, how about a variation of LoyceV's suggestion: Instead of holding a "lottery", all dust (where dust is defined to be anything below 10000 satoshis)  could be detected by  the Bitcoin Core wallet and auto-spent to one of Satoshi's addresses (since we know that he will never return, it won't be spent).

This would obviously be an opt-in setting on the Preferences page, and would be a very effective way to burn dust (provided that other wallets follow suit) butit has the disadvantage of putting a backdoor inside the blockchain, so it's probably a bad idea in its present state.

[o_e_l_e_o]

Or, how about a variation of LoyceV's suggestion: Instead of holding a "lottery", all dust (where dust is defined to be anything below 10000 satoshis)  could be detected by  the Bitcoin Core wallet and auto-spent to one of Satoshi's addresses (since we know that he will never return, it won't be spent).

Two downsides to this: It still clogs up the UTXO set each node has to keep with a bunch of dust outputs, and they eventually will be spent when quantum computing advances to a sufficient degree to break the ECDLP and all the early P2PK addresses become vulnerable. A better option would be to simply add on any dust to the fee. Then it creates no unnecessary UTXOs, and at least it goes to honest miners rather than some future dishonest criminal. If you really wanted to burn the dust instead, then an OP_RETURN output is both unspendable and does not add to the UTXO set.

[NeuroticFish]

Or, how about a variation of LoyceV's suggestion: Instead of holding a "lottery", all dust (where dust is defined to be anything below 10000 satoshis)  could be detected by  the Bitcoin Core wallet and auto-spent to one of Satoshi's addresses (since we know that he will never return, it won't be spent).

Two downsides to this: It still clogs up the UTXO set each node has to keep with a bunch of dust outputs, and they eventually will be spent when quantum computing advance to a sufficient degree to break the ECDLP and all the early P2PK addresses become vulnerable. A better option would be to simply add on any dust to the fee. Then it creates no unnecessary UTXOs, and at least it goes to honest miners rather than some future dishonest criminal. If you really wanted to burn the dust instead, then an OP_RETURN output is both unspendable and does not add to the UTXO set.

I find a proper burn address (like 1BitcoinEaterAddressDontSendf59kuE) already a better choice than Satoshi's.
But yes, that means unnecessary tx if one wants to burn and the other 2 options are much much better.

[n0nce]

Hypothetical: what if someone creates a Change Consolidation Lottery? It would work like this: you go to the website, get a deposit address, send your change/dust, and the service collects it. When enough inputs are piled up, a (provably fair) lottery is drawn. Higher deposits are more likely to win of course. The winner receives the total pool (minus transaction and service fees) back to the address their deposit came from.
If enough people use it, it will be difficult to link transactions.

Personally, I have never partaken in lotteries, let alone provably-fair ones,  because both statistics and probability theory clearly shows that the chances of winning in such lotteries are rather slim. Why spend money on things that will likely turn out to be unpleasant for your person?

I believe the idea is that if you do this long enough (this is the catch, though), statistically, you'll get as much out of the lottery as you put in. So if you deposit a thousand 1,000 sat UTXOs, eventually, you're guaranteed to win a whole 1,000,000 sat pool.
But it's a little bit like the Martingale strategy [1], where there is a very slim chance that you need e.g. to play this proposed lottery millions of times, even though you'll eventually win an even larger jackpot of e.g. 1BTC. But for that you would statistically need to also deposit 100,000 times, if you only send 1,000 sat every time. If this is once per day, it would still take you over 270 years to win that 1BTC and get all your deposits back.

A better option would be to simply add on any dust to the fee. Then it creates no unnecessary UTXOs, and at least it goes to honest miners rather than some future dishonest criminal. If you really wanted to burn the dust instead, then an OP_RETURN output is both unspendable and does not add to the UTXO set.

This is a great idea, honestly, just gift those dust outputs to the honest miners that nicely secure the whole network. Makes sense!

[1] https://en.wikipedia.org/wiki/Martingale_(betting_system)

[witcher_sense]

A better option would be to simply add on any dust to the fee. Then it creates no unnecessary UTXOs, and at least it goes to honest miners rather than some future dishonest criminal. If you really wanted to burn the dust instead, then an OP_RETURN output is both unspendable and does not add to the UTXO set.

This is a great idea, honestly, just gift those dust outputs to the honest miners that nicely secure the whole network. Makes sense!

Please explain to a technically incompetent person what you mean when you say "gift." As far as I know, there is no direct way exists to convert an unspent output to a transaction fee without also creating another output. A transaction fee is a difference between inputs' aggregated value and outputs' aggregated value. So, in order to donate miners all my inputs, I would need to create a transaction with zero outputs, which is likely against consensus rules. On the other hand, even if it is possible to create an output of zero value, then it still won't solve the problem of clogging up with unspendable UTXOs (instead of small amount UTXOs, the blockchain will be spammed with zero amount UTXOs).

[LoyceV]

Please explain to a technically incompetent person what you mean when you say "gift." As far as I know, there is no direct way exists to convert an unspent output to a transaction fee without also creating another output.

O_e_l_e_o's "add on any dust to the fee" was meant to happen before you have dust in your wallet. So, for example, instead of sending 1 Bitcoin with 1000 sat fee and 1000 sat change, you send 1 Bitcoin with 2000 sat fee and no change.

[o_e_l_e_o]

Yeah, what Loyce said. Or, you can absolutely create transactions which spend all the inputs as a fee, with 0 BTC in the outputs. Here are a few examples:

https://mempool.space/tx/9dc862cee6597a1748e4a1304be17c082a075eae243ce54432b47d5c300345a9
https://mempool.space/tx/8c307f3efe1b384f3b8528d3ed9ec62e0323358457826bd6731d64de9e3b7935
https://mempool.space/tx/eb31ca1a4cbd97c2770983164d7560d2d03276ae1aee26f12d7c2c6424252f29

Because these all only create OP_RETURN outputs which are not stored in the UTXO set they therefore don't clog up anything.

[LoyceV]

https://mempool.space/tx/eb31ca1a4cbd97c2770983164d7560d2d03276ae1aee26f12d7c2c6424252f29

Because these all only create OP_RETURN outputs which are not stored in the UTXO set they therefore don't clog up anything.

This txid nicely shows why not to do this: the $11 worth of "dust" they burned 9 years ago is now worth $3800. So keep it, guard it, label it. Then Lock it (in Bitcoin Core) or Freeze it (in Electrum) so you don't accidentally consolidate it. And then wait:

let it sit there till I can buy a house with the change

[witcher_sense]

O_e_l_e_o's "add on any dust to the fee" was meant to happen before you have dust in your wallet. So, for example, instead of sending 1 Bitcoin with 1000 sat fee and 1000 sat change, you send 1 Bitcoin with 2000 sat fee and no change.

Ah, now I see: this privacy-enhancing technique is often referred to as "change avoidance" where you are actively practicing careful coin control not to create unnecessary outputs. The downside of this is that you have to do all these adjustments manually while doing some mathematical calculations in your head, trying to figure out which step doesn't break your anonymity set. I would like to see bitcoin wallets that have some in-built fee adjustment mechanism aimed at guarding my privacy. For example, when I make a transaction and accidentally create unspendable small outputs as change, a wallet warns me about that and offers me to slightly increase or decrease the fee rate.

Because these all only create OP_RETURN outputs which are not stored in the UTXO set they therefore don't clog up anything.

In other words, OP_RETURN outputs are no longer part of bitcoin supply.

[LoyceV]

Ah, now I see: this privacy-enhancing technique is often referred to as "change avoidance" where you are actively practicing careful coin control not to create unnecessary outputs. The downside of this is that you have to do all these adjustments manually while doing some mathematical calculations in your head, trying to figure out which step doesn't break your anonymity set.

I don't think you can really automate this, it varies per transaction and depends on the label of each input. I prefer manual Coin Control in Bitcoin Core, and Advanced Preview in Electrum (both can be enabled in Settings).

I would like to see bitcoin wallets that have some in-built fee adjustment mechanism aimed at guarding my privacy. For example, when I make a transaction and accidentally create unspendable small outputs as change, a wallet warns me about that and offers me to slightly increase or decrease the fee rate.

Most wallets don't even warn you when you use an input that costs more in fees than it's worth (say 1000 sat from a legacy input while you pay 10 sat/byte fee). I've seen so many transactions that would have have more change if they would have used less inputs.

In other words, OP_RETURN outputs are no longer part of bitcoin supply.

The funds are now owned by the miner (and the Bitcoin supply wasn't reduced).

This topic reminded me to do some wallet maintenance, so yesterday I cleaned up 8 inputs.
The minimum amount at my favourite instant exchanger often changes. Today it's 36k sat, yesterday it was 3.6k sat. I thought it would depend on the transaction fee, but at the moment, transaction fees are as low as it gets.
Exchange rates for small amounts aren't the best, but it still beats collecting dust. I also made a payment for which the change was exchanged instantly (into my low-fee altcoin wallet which I use to pay services (such as VPN)).

[n0nce]

Ah, now I see: this privacy-enhancing technique is often referred to as "change avoidance" where you are actively practicing careful coin control not to create unnecessary outputs. The downside of this is that you have to do all these adjustments manually while doing some mathematical calculations in your head, trying to figure out which step doesn't break your anonymity set.

I don't think you can really automate this, it varies per transaction and depends on the label of each input. I prefer manual Coin Control in Bitcoin Core, and Advanced Preview in Electrum (both can be enabled in Settings).

I believe the idea would be to have an option before signing a transaction to say 'no change please' which increases the transaction fee to the point where there's no change generated; just output to the other party and change. That should be possible to do automatically.

[o_e_l_e_o]

For example, when I make a transaction and accidentally create unspendable small outputs as change, a wallet warns me about that and offers me to slightly increase or decrease the fee rate.

Electrum does this, to an extent. If you try to create a change output which would be dust, it automatically adds it on to the fee instead (and shows you a little icon you can hover over for it to explain what it has done).

In other words, OP_RETURN outputs are no longer part of bitcoin supply.

Correct.

The funds are now owned by the miner (and the Bitcoin supply wasn't reduced).

Not correct. Coins sent to OP_RETURN outputs are forever locked within that output and are provably unspendable. They do not belong to the miner and can indeed be subtracted from the total supply, since they will never move. Indeed, each instance of Bitcoin Core will automatically remove any such coins from its database.

[PrimeNumber7]

But then, even if we were to go with the assumption that a said government will go as far as doing what you suggested, you can still use a passthrough running on some server, that way, you break the connection between Nicehash and the pool, nicehash will tell your government that you mined to server xyz (which at least in theory nobody knows about), from there, unless they find a way to get into your server, they won't know where the hashrate went to, unless they contact every mining pool on planet earth.

You would need two servers for what you describe to work. Nicehash might tell inquiring minds that you mined at server xyz with an IP address of 1.2.3.4, and when the government inquires with the various pools, they could ask if anyone connected from IP address 1.2.3.4, however if server xyz forwards the work to server ABC with an IP address of 4.2.2.1, which subsequently forwards the work onto the pool, even if the government were to find the pool you were mining on, they would have no way of knowing the work originated from nicehash, nor the server that nicehash knows about.

One way which they can track you is by asking Nicehash for the total hashrate you pointed and then attempt to estimate how much "BTC" would have come out of it, and then they would track addresses that received a similar amount, but given that there will probably be a few hundred thousand miners getting that same sum of outputs, it will be extremely difficult to narrow it down to just you.

Your intermediary server(s) could split up the hashrate among multiple pools. If you are only mining on an unknown pool for a short time, I don't think there would be a lot of candidate miners who meet any given hashrate estimate.

[LoyceV]

even if we were to go with the assumption that a said government will go as far as doing what you suggested

Unless they're chasing a specific money flow, I don't expect government to dig this deep. Here, it's quite simpel: when you sell a substantial amount of Bitcoin for fiat on your bank account, they'll ask you where the money came from. It's up to you to explain the money is legit.
Banks have to report "unusual transactions", after which government doesn't really know what to do with them (link in Dutch).

I'm not trying to hide transactions from government, they want to know far too much from me already. But I'm still careful selecting which inputs to link together.

[mikeywith]

You would need two servers for what you describe to work. Nicehash might tell inquiring minds that you mined at server xyz with an IP address of 1.2.3.4, and when the government inquires with the various pools, they could ask if anyone connected from IP address 1.2.3.4, however if server xyz forwards the work to server ABC with an IP address of 4.2.2.1, which subsequently forwards the work onto the pool, even if the government were to find the pool you were mining on, they would have no way of knowing the work originated from nicehash, nor the server that nicehash knows about.

You can do that, but that would contribute to more added latency which is something you want to avoid when mining, going from NH to sever 1 > server 2 > Mining pool might not work perfectly, it will certainly work but the number of stale/rejected shares might be a bit high which would result in an overall more expensive operation than it already is.

I still think using a decentralized pool is the best approach, from NH > P2Pool is going to be very low latency, without any added cost, if the government manages to get your details from NH, there will be little to nothing of info.

[PrimeNumber7]

You would need two servers for what you describe to work. Nicehash might tell inquiring minds that you mined at server xyz with an IP address of 1.2.3.4, and when the government inquires with the various pools, they could ask if anyone connected from IP address 1.2.3.4, however if server xyz forwards the work to server ABC with an IP address of 4.2.2.1, which subsequently forwards the work onto the pool, even if the government were to find the pool you were mining on, they would have no way of knowing the work originated from nicehash, nor the server that nicehash knows about.

You can do that, but that would contribute to more added latency which is something you want to avoid when mining, going from NH to sever 1 > server 2 > Mining pool might not work perfectly, it will certainly work but the number of stale/rejected shares might be a bit high which would result in an overall more expensive operation than it already is.

I still think using a decentralized pool is the best approach, from NH > P2Pool is going to be very low latency, without any added cost, if the government manages to get your details from NH, there will be little to nothing of info.

The added latency would be an added cost to your privacy.

Using P2Pool may be an option to reduce your cost, and there would not be anyone for the government to talk to. However the government may be able to deduct the P2Pool blocks, and look at the hashrate you rented from NH (and for how long) to make an educated guess as to where your coin ended up.

even if we were to go with the assumption that a said government will go as far as doing what you suggested

Unless they're chasing a specific money flow, I don't expect government to dig this deep. Here, it's quite simpel: when you sell a substantial amount of Bitcoin for fiat on your bank account, they'll ask you where the money came from. It's up to you to explain the money is legit.
Banks have to report "unusual transactions", after which government doesn't really know what to do with them (link in Dutch).

I'm not trying to hide transactions from government, they want to know far too much from me already. But I'm still careful selecting which inputs to link together.

I think in most cases, people who have SARs filed on their transactions/activity are not breaking any laws, and will probably not be investigated. However if there is an investigation involving that person, the government will have those SARs available to help link money flows after the fact.

[n0nce]

I'm not trying to hide transactions from government, they want to know far too much from me already. But I'm still careful selecting which inputs to link together.

Maybe a little off-topic, but this is another advantage of Bisq: probably every time you sell BTC for fiat, the money arrives in your bank account from a different sender.
Instead, if you use one or two centralized exchanges, it will always come from those two bank accounts. This way, someone could link your outputs.
1] You send unlinked UTXO A to Binance
2] You cash out the amount to your bank account
3] You send unlinked UTXO B to Binanche
4] You cash out the amount to your bank account

Even though they were unlinked, by sending them to the same exchange and subsequently the same bank account, they can be linked.
Through Bisq, you could even sell one UTXO for fiat received via bank transfer, another for fiat received via Skrill, and another via 'cash in person'.

[LoyceV]

Maybe a little off-topic, but this is another advantage of Bisq: probably every time you sell BTC for fiat, the money arrives in your bank account from a different sender.

That's not helping: if I use reputable exchanges, my bank has less to worry about. If I often send/receive money to/from many different bank accounts, they'll have a reason to ask more questions. And it's not as if the bank wants to spend money asking questions, but government forces them to do this. Government also doesn't tell them which questions they have to ask, so banks ask anything they can come up with just to be on the safe side to avoid high fines again.