Splitting UTXOs in low fee environments

[Trapdoor9213]

Can someone explain to me why it is a good idea to break down UTXOs in low fee environments.
From my understanding you would end up paying more in transaction fees because of the initial splitting up of the UTXO.

[jackg]

I'm not sure what you mean? I know there's a reason for consolidating smaller inputs into one larger input so fees are cheaper.

Breaking up larger inputs might do something for privacy but probably not much unless you're mixing with the inputs/utxos too.

[Charles-Tim]

Some people can do that to avoid a coin to be tainted if paying into centralized platform account, like paying into ones exchange account.

It can be done for privacy reason.

If used for these reasons, like privacy reason, the coins will be used individually in a way the addresses are not connected together.

[OcTradism]

Can someone explain to me why it is a good idea to break down UTXOs in low fee environments.
From my understanding you would end up paying more in transaction fees because of the initial splitting up of the UTXO.

Break down UTXOs when network gives you low transaction fee, I don't get your question. You can take advantage of low fee time to make your transaction. If you don't spend all coin in your UTXOs, it will result in left over in a new UTXO in a same address or new address if you choose to use change address.

I only know about consolidate UTXOs when network has low transaction fee. Consolidate, not break down. You can consolidate your UTXOs anytime but if you do it when transaction fee is high, you will spend more money for consolidation.

[hatshepsut93]

People generally do the opposite - consolidate their UTXO when fees are low, because transaction costs more heavily depend on number of inputs rather than number of outputs.

Splitting your UTXO won't improve your privacy without additional measures. If you send someone your coin, they would traverse back the transaction and see the original UTXO that was split. You need to mix every new UTXO to brake connection between them.

[OcTradism]

People generally do the opposite - consolidate their UTXO when fees are low, because transaction costs more heavily depend on number of inputs rather than number of outputs.

With one transaction, the more inputs the bigger size and at same time, it will have higher transaction fee.

Size * fee rate = transaction fee

Consolidate inputs when fee rate is low is to reduce the transaction fee by reduce transaction size when you make a transaction. Low fee time does not last forever, sometimes it is low and other times it is higher or even very expensive.

If people consolidate inputs when fee rate is low, they won't have to care too much about transaction fee when fee rate is expensive. Because at least they completed the consolidation step very well to reduce transaction size already.

[khaled0111]

Actually it's recommended to do exactly the opposite. When you have multiple UTXOs, it's highly recommended to consolidate them into a single one by sending them to one of your addresses when fees are low. This will help reduce the size of your future transactions (less fees). But you need to be careful which UTXOs to consolidate if you have some addresses you don't want to be linked to each other.

Or are you talking about the coin control feature that some wallets have and that allows you which UTXOs to spend?

[LoyceV]

Splitting your UTXO won't improve your privacy without additional measures. If you send someone your coin, they would traverse back the transaction and see the original UTXO that was split.

Let's say you send someone funds from an address holding 1 Bitcoin. They know you own that address.
Now let's say you send someone funds from an address holding 1000 Bitcoin: they know you're rich!

If, however, you split up the 1000 Bitcoin into many smaller addresses, and use one of those addresses to pay someone, they can't be sure you also the parent address. You could have received the 1 Bitcoin from someone else, just like they did.

That's all hypothetical, considering OP has to ask the question, I assume he doesn't have the coins.

[hatshepsut93]

If, however, you split up the 1000 Bitcoin into many smaller addresses, and use one of those addresses to pay someone, they can't be sure you also the parent address. You could have received the 1 Bitcoin from someone else, just like they did.

They can't be sure, but they can be pretty confident. There can be many signs that will point out that all addresses belong to the same entity. If the split coins belong to different entities, they would generally be moved faster than if they belong to a single entity. The owner could also use different coins to pay to the same address, like their exchange deposit address.

So, I seriously doubt that simple splitting of coins would fool anyone who is determined to find a connection.

[NeuroticFish]

They can't be sure, but they can be pretty confident.

[~snip~]

So, I seriously doubt that simple splitting of coins would fool anyone who is determined to find a connection.

In most cases shading the smallest doubt can be enough. Not everybody is knowledgeable in bitcoin and every step / send away / more split can help the user tell "I only received that" (as LoyceV said) and be believed. You give too much credit to what can be done and how many do that really good.

However, I have a feeling that the user might be trying to research & attempt some sort of "mixing by hand" for some of his coins, but I certainly don't recommend that. A mixer does that job much better.

[LoyceV]

They can't be sure, but they can be pretty confident. There can be many signs that will point out that all addresses belong to the same entity. If the split coins belong to different entities, they would generally be moved faster than if they belong to a single entity. The owner could also use different coins to pay to the same address, like their exchange deposit address.

This is of course not a 1 day plan, it's something you should have been doing over the years since you own Bitcoin.

Alternative: Split your Bitcoin into "chips": 0.064 BTC each. It will look as if it came from ChipMixer. Or maybe they are. Nobody else can know that. For all I know people can be doing this already.

[PrimeNumber7]

People generally do the opposite - consolidate their UTXO when fees are low, because transaction costs more heavily depend on number of inputs rather than number of outputs.

The only reason why someone may want to split up their unspent outputs would be if they knew with certainty that they will be spending very specific amounts in the future (and they have a good estimate as to the future fee rates), and they split up their unspent outputs in a way such that a single new, split output is equal to an amount the person needs to pay in the future, plus tx fees, with no change. If fees go up by enough in the future, this may make sense, although it is generally unusual to know the exact amount that will be spent in the future.

[LoyceV]

they will be spending very specific amounts in the future (and they have a good estimate as to the future fee rates)

This reminds me of another reason: if you use cold storage, it's more convenient if you don't have to send change back to your cold storage.

[witcher_sense]

The only reason why someone may want to split up their unspent outputs would be if they knew with certainty that they will be spending very specific amounts in the future (and they have a good estimate as to the future fee rates), and they split up their unspent outputs in a way such that a single new, split output is equal to an amount the person needs to pay in the future, plus tx fees, with no change. If fees go up by enough in the future, this may make sense, although it is generally unusual to know the exact amount that will be spent in the future.

If you often are making recurring payments such as subscription payments (you know, these weird subscription payments denominated in bitcoin to people who consider bitcoin an established unit of account widely used in the bitcoin circular economy), and also if you don't want to clog up your wallet with unnecessary (small) change outputs, it does make sense to "prepare" some UTXOs for that. But this is hardly the only reason people may want to do UTXO splits. Consider the following example: you sometimes need fiat to pay your bills or visit your favorite grocery store. As a staunch bitcoin maximalist, you value your privacy and security of your funds conducting a peer-to-peer transaction with like-minded individuals and avoiding all centralized services that may infringe on your right to privacy and damage security. Given the well-known fact that bitcoin is both volatile and constantly growing in price, it is almost impossible to predict its future exchange rate in terms of fiat. Even very small UTXOs may represent a considerable amount of money in the future, so again it does make sense to have very small ones to be able to buy any desirable amount of fiat without creating unnecessary change and without compromising your privacy. As for privacy, in Whirlpool, a Samourai's CoinJoin implementation, there is a special transaction called tx0, which splits existing UTXO or UTXOs and creates outputs of equal amounts. Whirlpool makes use of these UTXO splits to create a perfect CoinJoin transaction with equal inputs and outputs. In the same way, you can always break down your own outputs into equal sizes and create so-called "fake" CoinJoin, which is basically a transaction that looks like CoinJoin but is done by only one person.