A Coin selection is the process that describes how algorithms that are driving Bitcoin choose which of your Bitcoins to spend online when you approve a purchase transaction.

If you have 1.2 Bitcoin 9BTC) in your crypto-wallet and you only pay out 0.3, you have 0.9 BTC left, well you’d think so right?

Well technically, yes. However it isn’t necessarily that simple. After all, you can have £100 in your physical wallet and that £100 could comprise of 2 50’s, or it could be 5 20’s, or 100 1 Pound coins. Each time you spend one of those coins or paper note you’re most likely get the remaining change back. As time goes on, if you keep paying with Pounds and Notes, you’ll only have a pile of Pounds and Pennies left over.

Similarly, that 1.2 BTC in your digital crypto wallet isn’t any different. The difference with Bitcoin (BTC) is when you make a transaction there are fees that are involved with it. So the process of choosing which specific Bitcoins (BTC) are sent over in the spend can cost you more.

Here we explain why.

Let’s go back to the hypothetical wallet we was talking about earlier with 1.2 BTC in it. Knowing it’s unlikely that you actually have one whole BTC and 0.2 BTC, let’s assume you have the following:

0.5 BTC
0.4 BTC
0.2 BTC
0.1 BTC

Now, when spending 0.3 BTC, you’d hope the algorithm would combine the 0.2 and 0.1 BTC to reach the spend value. It makes good sense, and given how Bitcoin calculates fees, there are lower costs in doing it this way.

The good news is that this is likely to happen. However, this is only since the Bitcoin dev team updated the algorithm earlier in 2018, to ensure more of a streamlined coin selection. Before this update the coins selection process was a little less sophisticated and inline.

When you completed the transaction of a 0.3 BTC spend, the older version of Bitcoin’s algorithm would almost always create a change output for you. This means it would invariably have taken the 0.4 or 0.5 Bitcoin (BTC), and then returned the change of 0.1 or 0.2 BTC to your crypto wallet, minus the fees.

While the Bitcoins algorithm update was good news for the future, the fact that there were years of Bitcoin transactions that happened before this update still needed addressing. This then created a digital equivalent of everyone having a wallet comprising 70% Pounds and Pennies, and perhaps 30% actual notes of value. The difference was that you can’t take your remaining Bitcoin balance stored in your crypto wallet into a bank and ask them to change all of those left over Satoshis back into Bitcoins for you.

As annoying as the small changes my sound, it’s easier to handle than fragments of left over BTC.

Bitcoin runs on a concept called the UTXO short for “unspent transaction output”. This is primarily the same concept that prevents the double-spend from occurring. Each time a BTC transaction is authorized, the Bitcoin algorithm then ensures that the crypto wallet contains at least the value of the purchase and the fee price before the PoW consensus protocol actually approves the transaction and for it to be processed successfully.

Bitcoin had opted for the UTXO mechanism because it makes the proof of work algorithm simple work. It also permits the parallel processing of BTC across multiple accounts, which in-turn enhances scalability. Finally, it allows for Simple Payment Verifications (SPV), lightweight clients that can verify and approve a payment’s inclusion in the blockchain without the need for downloading the full database.

However, UTXO has some drawbacks. Most notably, it doesn’t work for smart contract platforms given that each output can only be owned by one person. As explained by Vitalik Buterin, this is why Ethereum opted for a different concept, called the Account/Balance Model. Although this concept offers some benefits over UTXO, scalability is not 1 of them. For all the many benefits Ethereum has to offer, scalability is an issue that continues to haunt its developers.

The simple answer is yes, Bitcoin has since updated their algorithm. Coin selection or satoshi selection is a more sophisticated process as a result, targeting UXTO values that best match transaction value. However, the situation remains that there are many, many tiny pieces of BTC now circulating called Satoshis.

In 2017 , A Bitcoin developer attempted to crack a sophisticated and complex calculation to work out what the possible value of these tiny pieces would be. He concluded that Bitcoin (BTC) can be compared to a vault, two-thirds are full of low-value trinkets, and one-third is full of high-value items. Eventually, the fees for moving the trinkets out of the said vault could then end up being more than the value of the trinkets themselves.

It was the blockchain developer Mark Erhardt who first proposed how to enhance the Bitcoin coin selection algorithm. Although, it was a guy called Andrew Chow who updated the infrastructure with the update. Erhardt now works for a company called BitGo, which develops enterprise crypto-currency solutions for institutional asset investors. He has developed Predictive UTXO, which helps to counterbalance the fees involved in spending many small UXTO values.

All in all, you can find Bitcoin transaction fees are lower when there is less traffic on the network, and as expected much higher when traffic is high on the network. This is why many people were not happy about the high fees during December 2017 when Bitcoin’s value reached nearly £14,000.

Predictive UTXO uses its algorithm to collate together the smallest fragments of BTC in transactions when fees are low. When fees go up, it minimizes transaction sizes to offset this increase. In this way, Predictive UTXO is saving BitGo clients up to 30% percent on fees.

If Predictive UTXO could be spanned out across other exchanges and crypto-wallets, it will provide some cushioning against the fees involved in using up and spending the minuscule BTC fragments that exist in many of our crypto-wallets.

Some people may consider that fees are so small so as not to matter. While fees can end up being pennies on the pound, Tech-Savvy investors know that compounding of interest matters. If all us of can reduce the fees and reinvest the difference made, the satoshis and fragments of BTC are potentially worth much more in the years to come.


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