Combined summary - Liquidity provider utxo management

Combined summary - Liquidity provider utxo management

The email discusses various aspects of optimizing coin selection algorithms and managing Unspent Transaction Outputs (UTXOs) for cryptocurrency transactions, particularly in the context of liquidity management and transaction fee optimization.

A significant focus is placed on finding efficient ways to conduct transactions that minimize fees and use UTXOs effectively.

A Python simulation script,, was introduced as a faster alternative to a previous version for testing coin selection algorithms without the complexity of Bitcoin's bitcoind. The aim is to identify a heuristic that minimizes total fees by considering feerate and funding request probability distributions. Results from these simulations are pending, with an expectation they will inform about less costly transaction strategies.

The discussion also covers enhancements in Bitcoin protocol through draft PRs aimed at adding new coin selection parameters, notably add_excess_to_recipient_position. This change proposes utilizing excess value from transactions—currently treated as waste—for beneficial purposes like increasing output in controlled addresses or improving Lightning Network channel funding efficiency. It suggests a strategic approach for Lightning Service Providers (LSPs) to manage UTXOs for minimizing transaction fees while maximizing liquidity provision capabilities.

Experiments evaluating transaction fee optimization algorithms revealed that all tested algorithms performed slightly better than using only Branch and Bound (BnB) combined with CoinGrinder in terms of total fees and median inputs. This discovery led to further analysis on the consolidationfeerate setting and its impact on preferring fewer input transactions. The experiments explored the flexibility of Lightning funding transactions to improve transaction efficiency by varying the min_change values, thus potentially bypassing the need for exact BnB solutions.

Further, the conversation explores strategies for creating "changeless solutions" to liquidity transactions by targeting specific amounts that correspond to the deficits in various buckets. This involves generating multiple target amounts and attempting to construct transactions for each separately to maximize UTXO usage efficiency.

There's also a detailed proposal on optimizing liquidity transactions within a cryptocurrency framework, focusing on managing transaction fees efficiently across multiple transactions. This includes categorizing coins into target buckets based on user-defined attributes, determining which bucket needs refilling, and selecting coins that allow for strategic change outputs distribution.

Lastly, the email touches on challenges faced by liquidity providers in managing wallets efficiently for Lightning Network operations. A proposed solution emphasizes optimizing UTXO management through strategies like importing a set of target UTXOs tailored for different fee rates and transaction requirements. Preliminary results from testing this solution showed a potential reduction in on-chain fees by approximately 15%, suggesting further room for refinement and improvement in the strategy.

Overall, the discussion encapsulates efforts to refine cryptocurrency transaction processes through algorithmic improvements and strategic management of UTXOs, aiming for cost-effective and efficient liquidity management and transaction execution.

Discussion History

remyers Original Post
February 22, 2024 14:49 UTC
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