Proposal: Unlocking Dust UTXOs as Miner Transaction Fees

These discussions delve into technical and economic considerations of proposed changes aimed at enhancing the fungibility of Bitcoin and reducing the bloat of the Unspent Transaction Output (UTXO) set, which represents all bitcoins not yet spent.

One segment of the conversation focuses on a revised proposal addressing the reintegration of dust satoshis back into the Bitcoin network at the Layer 1 level. The necessity of finding a solution for dust UTXOs is emphasized, with the proposal suggesting that allowing miners to claim authorized dust UTXOs through standard-format transactions could distribute the transaction overhead across many claims without changing the existing rule for coinbase transactions to only have one input. Moreover, it introduces a mechanism for spending dust outputs without meeting their original conditions by creating a "Dust Fee Authorization" transaction. This would enable the use of dust UTXOs below a specific threshold in a manner that adheres to new, strict rules, potentially as part of a soft fork.

Pieter Wuille's critique sheds light on the practical and economic challenges of implementing such changes as a soft fork, emphasizing that any alteration allowing coinbase transactions to spend outputs or change the rules surrounding dust outputs would necessitate a hardfork. Wuille argues that the economic viability of the proposed methods, including the costs associated with OP_RETURN outputs and additional coinbase transaction inputs, might outweigh the benefits of reclaiming dust output values.

Further discussion explores the dynamic nature of the dust threshold, suggesting flexibility in wallet software to adapt based on mempool conditions, and the focus on simple key-controlled UTXOs to keep initial implementations manageable. There's an openness to future expansions that could address more complex script types. Concerns about exceeding metadata requirements and the economic viability of the proposal during high-fee periods are also raised, alongside possibilities for reducing transaction weight through innovations like Schnorr signatures.

Critiques extend to the practicality of the proposal, questioning the improvement it offers over existing methods, especially given potential high transaction fees that could negate the economic advantage of reclaiming dust UTXOs. The dialogue reflects on the balance between technical feasibility, economic incentives, and the overall goal of enhancing Bitcoin's efficiency and utility.

Pieter Wuille's proposal introduces a novel approach to this challenge, proposing a system where users can allow their dust UTXOs to be claimed by miners as transaction fees through cryptographic authorization. This voluntary method aims to benefit users by recovering lost value, provide additional fee income for miners, and reduce the UTXO set size. Key features include its implementation via a soft fork for backward compatibility, minimal impact on consensus logic, and its focus on user consent, security, and economic rationale. The proposal, detailed on GitHub, represents a thoughtful strategy to improve Bitcoin's handling of dust UTXOs while seeking further community feedback to refine its approach.