Liquidity provider utxo management

Liquidity provider utxo management

Original Postby remyers

Posted on: March 20, 2024 15:37 UTC

In the discussion, several strategies for optimizing Lightning funding transactions were highlighted, focusing on innovative ways to manage transaction fees and improve efficiency.

A key idea centers around leveraging the unique flexibility of Lightning funding transactions regarding the amount funded. Unlike traditional transactions that aim for precision, Lightning transactions permit variations above or below the targeted funding amount. This characteristic allows for a more flexible approach to funding channels, where the exact amount does not need to be met, providing an opportunity to minimize waste and potentially reduce overall fees.

The concept of utilizing what is typically considered 'excess' in the coin selection process for Bitcoin's Branch and Bound (BnB) algorithm is proposed as a method to enhance funding efficiency. In conventional scenarios, excess funds resulting from the selection of unspent transaction outputs (UTXOs) are viewed as waste, often allocated to transaction fees. However, by incorporating these excess funds into the target funding amount instead of forfeiting them as fees, there's a potential to execute changeless funding transactions. This approach could lead to a reduction in total transaction fees by efficiently using UTXOs that are slightly larger or smaller than required, within a tolerance of about 5%.

This innovative strategy is currently under simulation to evaluate its effectiveness in reducing fees and optimizing the funding process for Lightning channels. The results of these simulations are anticipated to provide valuable insights into the practical application of this approach and its impact on the economics of Lightning network operations.