Tom Honzik
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,Historically, understanding bitcoin UTXOs has been considered intermediate to advanced knowledge among bitcoin owners. Although there is a large and increasing population of people who use bitcoin, only a small percentage of them can explain what a UTXO is and why they matter.
However, as we transition into the future of bitcoin adoption, there will necessarily be some major changes to the ways that most people use and interact with the monetary network. In this article, we will explain why understanding UTXOs may soon become much more crucial, and why there has been recent discussion about why you might want to avoid holding relatively small UTXOs.
Holding small UTXOs can potentially result in much or all of that bitcoin becoming practically immovable in the future due to the cost of transaction fees. To understand why this might be the case, and what qualifies as a “small” UTXO, we first need to review dust and fee rates.
What is bitcoin dust?
In the world of bitcoin, dust colloquially refers to a UTXO with a value smaller than the transaction fees the owner would have to pay in order to spend it. In other words, if someone has a UTXO worth 5k sats, but it would cost 6k sats in transaction fees to be spent, they are disincentivized from spending it. Why would you ever choose to pay a fee that grants you access to a smaller amount of money than what you just paid? This describes the nature of dust—bitcoin that is effectively stuck where it is, useless to the owner.
A common and more precise definition of dust as it relates to mempool policy (what I might call “technical dust”) can be found here.
Naturally, the UTXOs categorized as dust will typically have very tiny values. However, the transaction fee required to spend any given UTXO is partially dependent on the current market demand to move bitcoin. This means that if the market demand increases, and fee rates increase as a result, larger-sized UTXOs can enter the dust category. Then, if demand were to subside, some of those bigger UTXOs could lose their dust status.
If we suppose that global bitcoin adoption has a lot of room to grow, it is reasonable to speculate that the average market demand for transferring bitcoin on the blockchain might also grow substantially, and with permanence. The implication would be that the general size of a UTXO qualifying as dust becomes different than it has been historically. In the following sections, we will run the numbers to investigate what this could look like, and discuss strategies to help prevent the possibility of some of your bitcoin nearing the dust threshold.
If you are interested in diving deeper on the technical side of dust, Unchained co-founder Dhruv Bansal wrote an extensive article about this topic nearly five years ago.
Calculating dust thresholds
As you may know from our previous articles about how bitcoin fees are calculated and managing UTXOs across fee rate environments, the cost to move bitcoin is determined by two things: the amount of transaction data being used (virtual bytes or vB), and the chosen fee rate (sats/vB). To be clear, the amount of bitcoin being moved is irrelevant to the transaction fee.
Let’s investigate these components in more detail, so that we can begin to form an idea of how much it can cost to move a UTXO, and therefore what dust thresholds can look like.
Diving into transaction data
The amount of data for a particular transaction is constant, but the amount of data can vary from one transaction to another. The main contributors to the data volume are the number of transaction inputs, the number of transaction outputs, and the address types involved. Until we see further Taproot adoption, using multisig can also increase the transaction data, and the multisig quorum size also matters (2-of-3 is less data than 3-of-5). For the sake of simplicity, we will focus mainly on singlesig addresses in this article.
Each UTXO being moved will act as a transaction input, and will add 57.5 vB to 148 vB worth of data to a transaction. In addition, all transactions include 10 vB or 10.5 vB of “overhead,” and need at least one output, adding another 31 vB to 43 vB. If you’d like to go deeper into where these numbers come from, Bitcoin Optech has a fantastic free resource to play around with.
Altogether, the data required to move one singlesig UTXO to one new address should add up to a range of 99 vB to 202.5 vB. If multiple UTXOs are moved together within the same transaction, that can add efficiency and reduce the total data per UTXO, because you would only have to pay for the overhead and output data once, rather than multiple times over the course of several transactions.
In the interest of using conservative, round numbers (and allowing for a second change output, which will become more relevant in the later part of this article), choosing 250 vB to represent the amount of data to move a UTXO is reasonable. If you are using 2-of-3 multisig, consider 400 vB instead.
Now that we have a number to work with for the transaction data, we can move on to discussing the other factor in our cost calculation, the fee rate.
Low fee rates and true dust
The fee rate is a variable that the sender chooses after considering factors such as the urgency of their transaction, and the current market demand for utilizing bitcoin’s limited blockspace.
Over the course of bitcoin’s 14 year history, the transaction fee market has seen spikes of demand that eventually cool off, returning to low-fee conditions. For example, from July 2021 to February 2023, the backlog of transactions waiting to be processed (also called the mempool) was often completely cleared. This meant that users could usually get transactions processed in the next block mined, even when choosing a low fee rate such as the effective minimum of 1 sat/vB.
If we use 1 sat/vB to represent a low-demand fee environment, and we also grab the 250 vB number from earlier, then we can bring them together to calculate the approximate, conservative cost to move a UTXO in this setting: 250 sats. Any UTXO with a value smaller than 250 sats can be considered dust, and it would be mostly useless to whoever holds it.
This describes what I would call the “true dust” threshold, or the threshold where the UTXO has no opportunity to ever be spent profitably, because a selecting fee rate lower than 1 sat/vB cannot realistically be accomplished. Luckily, most bitcoin software protects users from sending and receiving UTXOs this small, by enforcing a lower limit of 546 sats. This also makes it more expensive for spammers to perform relatively harmless “dust attacks.”
Higher fee rates and operative dust
When there is an increase in market demand to send bitcoin quickly, the fee rate that someone must pay to get their transaction mined into the next block also increases. Blocks are mined once every ten minutes on average, and each block can only hold up to 1,000,000 vB. These limitations exist intentionally, to help keep bitcoin decentralized. As a result, users begin trying to outbid each other to earn a place in the block.
Fee rates can spike up and down rapidly, but they can also remain elevated for periods of time. If you have a UTXO and want to spend it, you may have to choose a fee rate higher than 1 sat/vB, and perhaps a lot higher. Doing so will increase the transaction fee, and it will also increase what I would call the “operative dust” threshold. Operative dust refers to a UTXO that has become dust due to increased fee rates, but can potentially lose its status as dust if fee rates decline. Let’s take a look at approximate operative dust thresholds among different fee rates:
| Fee rate | 5 sat/vB | 10 sat/vB | 50 sat/vB | 100 sat/vB | 500 sat/vB | 1,000 sat/vB |
| Dust threshold | 1,250 sats | 2,500 sats | 12,500 sats | 25,000 sats | 125,000 sats | 250,000 sats |
As you can see, at higher fee rates, operative dust begins to include UTXOs with much more substantial values. While most people don’t purposely hold UTXOs with the tiny values mentioned earlier, it’s not uncommon for sat stackers to have some UTXOs in the 25k to 100k sats range. Yet, there have been several periods lasting a week or longer where UTXOs of that size reached (or came close to reaching) operative dust status. Examples can be found among May 2017, December 2017, January 2018, April 2021, and May 2023.
Fee protection goes beyond dust
Understanding operative dust thresholds in various fee environments is a great start, but more knowledge is needed to adequately protect your bitcoin wealth from transaction fees. After all, dust thresholds only tell us when the fee to move a UTXO is the same as 100% of the UTXO’s value. If the fee to move a UTXO is 90% of its value, it is not technically dust, but it is certainly a situation to try to avoid. Nobody wants the purchasing power of their UTXO to be a mere 10% of the face value, due to the rest being eaten up by fees.
Not only would most people become upset by being forced to pay a 90% fee to spend their bitcoin, but most of us would probably also be quite uncomfortable with a 50% fee. Or even a 20% fee. In fact, many people would probably only consider a tiny percentage to be reasonable.
If you have an idea of what fee percentage you want to avoid ever paying, then you can calculate the minimum UTXO value you would need in order to achieve the protection you want, in various fee environments. In the following chart, some examples are shown.
| 5 sat/vB | 10 sat/vB | 50 sat/vB | 100 sat/vB | 500 sat/vB | 1,000 sat/vB | |
| 25% maximum fee | 5k sats | 10k sats | 50k sats | 100k sats | 500k sats | 1M sats |
| 10% maximum fee | 12.5k sats | 25k sats | 125k sats | 250k sats | 1.25M sats | 2.5M sats |
| 5% maximum fee | 25k sats | 50k sats | 250k sats | 500k sats | 2.5M sats | 5M sats |
| 2.5% maximum fee | 50k sats | 100k sats | 500k sats | 1M sats | 5M sats | 10M sats |
| 1% maximum fee | 125k sats | 250k sats | 1.25M sats | 2.5M sats | 12.5M sats | 25M sats |
If you’re concerned about needing to move your bitcoin in a 100 sat/vB environment, and you want to prevent yourself from having to pay 5% in transaction fees, your strategy should be to hold most of your bitcoin in UTXOs with a value in excess of 500,000 sats.
Of course, if you are instead concerned about a 200 sat/vB environment, your target UTXO value would double to 1M sats (0.01 BTC). Or, we could arrive at the same result if we return to the 100 sat/vB environment, but you want to upgrade your fee protection from 5% to 2.5%. You can adjust these numbers to fit your needs!
Another way to look at the same data is by examining certain UTXO sizes, and what level of fee protection they provide you at different fee rates:
| 5 sat/vB | 10 sat/vB | 50 sat/vB | 100 sat/vB | 500 sat/vB | 1,000 sat/vB | |
| 50k sat UTXO | 2.5% max fee | 5% max fee | 25% max fee | 50% max fee | operative dust | operative dust |
| 100k sat UTXO | 1.25% max fee | 2.5% max fee | 12.5% max fee | 25% max fee | operative dust | operative dust |
| 500k sat UTXO | 0.25% max fee | 0.5% max fee | 2.5% max fee | 5% max fee | 25% max fee | 50% max fee |
| 1M sat UTXO | 0.13% max fee | 0.25% max fee | 1.25% max fee | 2.5% max fee | 12.5% max fee | 25% max fee |
| 5M sat UTXO | 0.03% max fee | 0.05% max fee | 0.25% max fee | 0.5% max fee | 2.5% max fee | 5% max fee |
Please remember that for pre-Taproot multisig, higher values should be considered.
Preparing for the future of bitcoin adoption
Nobody knows for sure what bitcoin fee rate environments in the future will look like. Only a tiny portion of the global population has begun using bitcoin in a serious capacity, indicating that the demand for blockspace has a lot of room to grow. This could certainly drive fees much higher in the coming years.
On the other hand, whenever fees increase we can usually expect a resulting decline in demand to move bitcoin, especially for smaller UTXOs that are becoming priced out of the market. This should create an equilibrium effect, and provide some confidence that fee rates will never permanently become “too high” for the majority of UTXO holders.
Additionally, technologies layered on top of bitcoin—such as the Lightning Network—are helping people use bitcoin outside of the blockchain. This allows for faster and cheaper payments, thereby also reducing the demand for on-chain transactions. When demand is reduced, fee rates are driven downwards.
When it comes to managing your UTXOs, several people have recommended an easy rule of thumb, which is trying to hold most of your bitcoin in UTXOs worth at least 1M sats. This is not an unreasonable recommendation, but it contains some speculation and oversimplification. Upon reading this article, you are equipped to decide whether you want to use that rule of thumb, or customize your UTXO sizes according to your preferences and predictions.
If you hold a substantial portion of your bitcoin in UTXOs that are smaller than you’d like, you can consider consolidating them into fewer, larger UTXOs. We have another article that discusses this in detail.
Could UTXOs become a luxury item?
If we work with the popular recommendation of 1M sats per UTXO, then at a price of $30k per bitcoin, one UTXO will cost $300. At the market cycle highs in 2021, a UTXO of this size would have cost nearly $700. If we believe that bitcoin’s price can skyrocket upwards like it has in the past, then it’s not hard to see how a 1M sat UTXO could suddenly cost thousands of dollars to acquire.
If this happens, it could mean that even developed nation, middle class populations will be unable to afford the traditional methods of holding bitcoin in self-custody, on-chain wallets. This idea should highlight the urgency for robust second layer applications, and perhaps trust-minimized custody alternatives.
For people who do own UTXOs, such a position may become a luxury and a privilege. It can prove to be important to take your UTXOs seriously, and manage them with thoughtful care. If you use a collaborative custody partner like Unchained, you can have access to experts on demand, helping you think through your UTXO management strategies. Learn more about Unchained Signature, our private client experience offering you dedicated account management.