Liquidity provider utxo management

Liquidity provider utxo management

Original Postby remyers

Posted on: March 22, 2024 09:23 UTC

In recent experiments conducted to evaluate the efficiency of different algorithms in transaction fee optimization, an unexpected outcome was observed.

The initial tests revealed that all algorithms tested produced slightly lower total fees and fewer median inputs compared to when only BnB (Branch and Bound) combined with CoinGrinder were utilized. This sparked further investigation into the matter, especially considering the potential implications on transaction fee optimization strategies.

A key focus of the inquiry was the consolidationfeerate setting, which was adjusted to 0 in these experiments. This adjustment meant that CoinGrinder would always be preferred whenever a BnB solution with fewer inputs was not available, underlining the algorithm's preference for lesser input amounts even if it meant creating useful change less frequently. The experimentation did not modify the default behavior regarding the minimum change amount, relying instead on the standard settings for determining the change target.

The context of the experiment involved a scenario file predominantly characterized by transactions that sent bucketed amounts and infrequently received payments. This setup led to the exploration of leveraging the unique flexibility of Lightning funding transactions, where exact amounts are not strictly necessary. This insight opened up the possibility of employing CoinGrinder with varying min_change values to potentially bypass the need for precise BnB solutions, thereby enhancing the success rate of finding usable UTXOs at different fee rates.

Moreover, the approach considered the strategic advantage of not generating change for liquidity management purposes. Ideally, single-input, changeless BnB solutions were preferred due to their simplicity and efficiency. When such solutions were not feasible, strategies shifted towards creating change outputs that could replenish specific buckets or, as a less desirable option, consolidating small non-bucketed UTXOs, especially when fee rates were low. This nuanced strategy aimed to refine the balance between minimizing transaction fees and optimizing liquidity management through judicious use of UTXOs.