Add Xapo consolidation article

Author: jnewbery

_posts/en/2018-07-30-xapo-consolidation.md

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+---
+title: 'Field Report: Xapo UTXO Consolidation'
+permalink: /en/xapo-utxo-consolidation
+name: 2018-07-30-xapo-utxo-consolidation
+type: posts
+layout: page
+lang: en
+version: 1
+---
+
+
+---
+
+As mentioned in [newsletter #3][newsletter 3], the past few months of low
+transaction fees has made it a great time to do UTXO consolidation!
+Consolidation has been one of a variety of activities [Xapo][Xapo] has been
+undertaking to be prepared for the next time fees spike like they did in the
+last few months of 2017.
+
+[newsletter 3]: https://bitcoinops.org/en/newsletters/2018/07/10/#dashboard-items
+[Xapo]: https://www.xapo.com/
+
+The idea behind UTXO consolidation is essentially this: when your average
+outgoing payment is larger than your average incoming payment (or when they’re
+the same, but you’re batching outgoing payments), you’ll often have to combine
+many UTXOs in order to fund an outgoing transaction, which increases the size
+of your transactions and hence the fees you pay. By consolidating UTXOs in
+advance, you can move most of that data forward in time, giving you more
+control over when most of those costs are incurred, and if you can do it when
+fees are low, that lets you reduce those costs pretty substantially. For
+example, if you would have spent a dozen 2-of-3 multisig inputs at 100 s/B
+(satoshis per byte), that would cost around 360,000 satoshis; while if you
+consolidated those inputs beforehand at 2 s/B, and then spent the single
+consolidated input later at 100 s/B, your total cost for the two transactions
+is only about 41,000 satoshis. And if fees don’t rise the risk isn’t huge: if
+fees just sat at 2 s/B, you’d be spending 7,900 satoshis across two
+transactions if you consolidated, rather than spending 7,200 satoshis in a
+single transaction if you did nothing.
+
+Consolidation also gives an opportunity to update the addresses you use for
+your UTXOs, for example to roll keys over, switch to multisig, or switch to
+segwit or bech32 addresses. And reducing the number of UTXOs makes it easier to
+run a full node too, marginally improving Bitcoin’s decentralisation and
+overall security, which is always nice.
+
+Of course, one thing you really don’t want to have happen is for your
+consolidation transactions to somehow fill up the blockchain and cause fees to
+immediately start rising! There are two metrics to watch to avoid this risk:
+one is whether the [mempool][mempool] is full (which causes the minimum
+acceptable fee to rise), and the other is how much empty space there has been
+in recent blocks (which gives an indication of whether miners will accept more
+transactions at the minimum fee). Both these metrics have been very promising
+most of the time over the past few months: the mempool has regularly been close
+to empty, meaning the transactions paying as little as 1 s/B have been
+propagated to miners, and many blocks have not been full, meaning cheap
+consolidation transactions will get mined reasonably quickly, rather than
+creating a backlog that will cause fees to rise.
+
+[mempool]: https://statoshi.info/dashboard/db/memory-pool?panelId=1&fullscreen&from=1509458400000&to=1531813659334&theme=dark
+
+The approach we took to actually doing the consolidation was to have a script
+that would select groups of small UTXOs, and create a consolidation transaction
+spending them to a single pool address at a fee rate of 1.01 satoshis per byte.
+The script gradually feeds consolidation transactions into the network, so it
+doesn’t cause too large a spike in the mempool, and perhaps more importantly so
+we don’t risk having our transactions get dropped because they have low fees
+and the mempool has filled up. We triggered this manually when we were
+comfortable it won’t interfere with our operations, and when there doesn’t seem
+to be much load on the Bitcoin network in general.
+
+All in all, this has worked out pretty well; we’ve reduced our UTXO count by
+something like [4 million UTXOs][4 million UTXOs] this year, and aside from
+some [concerned][redditors1] [redditors][redditors2], the cost to the network
+as a whole has been minimal, as has the cost to us.
+
+[4 million UTXOs]: https://www.oxt.me/entity/Xapo
+[redditors1]: https://www.reddit.com/r/BitcoinDiscussion/comments/8ocyc9/massive_consolidation_currently_underway/
+[redditors2]: https://www.reddit.com/r/Bitcoin/comments/8p3y5b/does_xapo_spamming_the_blockchain/
+