Xapo consolidation

_includes/articles/towns-xapo-consolidation.md

@@ -0,0 +1,83 @@
+{% comment %}<!--
+Copyright 2018 Anthony Towns
+-->{% endcomment %}
+
+As mentioned in [newsletter #3][newsletter 3], the past few months of low
+transaction fees makes 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.
+
+{% assign img1_label = "Plot of total Bitcoin UXTOs, January - July 2018" %}
+
+{:.center}
+![{{img1_label}}](/img/posts/utxo-consolidation-2018.png)<br>
+*{{img1_label}},
+source: [Statoshi](https://statoshi.info/dashboard/db/unspent-transaction-output-set?panelId=6&fullscreen&from=1514759562608&to=1532039707168)*
+
+[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 combine inputs ahead of time, giving you more
+control over when most of those costs are incurred. 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: i.e. 87% less paid in fees. 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 wouldn't interfere with our operations, and when there didn’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/
+
+{{include.hlevel | default: '##'}} Additional resources
+
+- [Techniques to reduce transaction fees: consolidation](https://en.bitcoin.it/wiki/Techniques_to_reduce_transaction_fees#Consolidation) - Bitcoin Wiki
+- [How to cheaply consolidate coins to reduce miner fees](https://en.bitcoin.it/wiki/How_to_cheaply_consolidate_coins_to_reduce_miner_fees) - Bitcoin Wiki
+- [What are some best practices regarding the usage of consolidations and fanouts?](https://bitgo.freshdesk.com/support/solutions/articles/27000044185-what-are-some-best-practices-regarding-the-usage-of-consolidations-and-fanouts-) - BitGo

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

@@ -0,0 +1,15 @@
+---
+title: 'Field Report: Consolidation of 4 Million UTXOs at Xapo'
+permalink: /en/xapo-utxo-consolidation/
+name: 2018-07-30-xapo-utxo-consolidation
+type: posts
+layout: post
+lang: en
+version: 1
+---
+
+{:.post-meta}
+*by [Anthony Towns](https://twitter.com/ajtowns)<br>Developer on Bitcoin Core
+at [Xapo][]*
+
+{% include articles/towns-xapo-consolidation.md hlevel='##' %}