Proposal: Unlocking Dust UTXOs as Miner Transaction Fees

The discussion opens with an acknowledgment of the technical concerns raised regarding the original proposal on addressing coinbase limitations and the requirements for a soft fork in the Bitcoin network. The revised proposal aims to tackle the issue of dust UTXOs, which are considered a deadweight loss to the network. These small amounts of satoshis that cannot be spent due to their low value diminish Bitcoin's fungibility. The proposal emphasizes the need for a solution at the Layer 1 (L1) level to reintegrate these dust satoshis into the network effectively, arguing that relying on Layer 2 (L2) solutions only serves as a temporary fix.

The amendments presented focus on two main concerns: the handling of coinbase transaction inputs and the spending of dust outputs without fulfilling their original conditions. For coinbase transactions, which traditionally can only have one input, the revised solution suggests allowing miners to claim authorized dust UTXOs through separate standard-format transactions. This approach would enable the batching of multiple dust UTXOs, making it economically viable by distributing the transaction overhead across many claims, without altering the existing single-input rule for coinbase transactions.

Regarding the spending of dust outputs, the proposal introduces a mechanism where miners could spend dust UTXOs without meeting their original conditions through new, strict rules. This includes creating a "Dust Fee Authorization" (DFA) transaction using an OP_RETURN output, which authorizes the miner to claim the dust. These transactions must occur within the same block, and only dust UTXOs below a specific threshold (546 sats) are eligible. This method ensures that the spending of dust UTXOs adheres to a valid soft fork by imposing new restrictive conditions that were previously not possible.

The economic and practical viability of this revised approach is also addressed. By maintaining the structure of coinbase inputs as is, the economic burden is lessened. The proposal advocates for the batching of multiple dust UTXO authorizations into a single DFA transaction, which significantly reduces overhead costs and enhances economic feasibility, particularly during times of lower mempool congestion when transaction fees are minimal.

This comprehensive review of the proposed mechanism seeks feedback on its ability to resolve the highlighted concerns while achieving the goal of reactivating dust satoshis in a voluntary, secure, and economically rational manner. The conversation underscores the importance of reevaluating initial proposals through constructive critique to develop more effective solutions within the Bitcoin development community.