Nobody is ready for high fees

Jun 10, 2024

OKX just burned $17 million consolidating UTXOs.

This isn’t unheard of — we saw Binance cause a massive fee event in November 2022 doing the same thing. But in a competitive fee environment, over 100 sats/vbyte, these transactions can get very expensive very quickly.

This issue extends from wallet fee estimations to die-hard Bitcoin DCA folks who haven’t practiced UTXO consolidation. These “inefficiencies” may grow to become one of the biggest points of friction for Bitcoin users in the coming years.

Binance was ONLY interesting “fee event” in 2022.

What did OKX do? Let’s use OKX as a case-study. When users deposit Bitcoin to an exchange like OKX, the exchange receives on-chain transactions in the form of Unspent Transaction Outputs (UTXOs). When you deal in tens of thousands of user deposits you end up with as many or more UTXOs. Withdrawing from exchange → on-chain requires converting the OKX balance to an on-chain balance in the form of UTXOs. Often exchanges will regularly consolidate these UTXOs to optimize their withdrawal costs & wallet management.

But OKX did not optimize the “consolidation” process. When you consolidate 100,000+ UTXOs as they did this past weekend, you have to do it over many blocks (and sometimes several days). They appear to have run a program that sent out a batches of transactions a few thousand at a time, but each batch would re-estimate the fee rate based upon the current prevailing rate. But when you are the majority of transactions on the Bitcoin network (as OKX was for a while this weekend) you are effectively bidding against yourself. OKX could have spread out their transactions in a much more optimal way and saved at least a few million.

While OKX can stomach this expense, it’s a harbinger of what’s to-come and how many Bitcoin users, companies, are not prepared.

If Bitcoin were in a higher-fee regime (OKX started their consolidation at ~15sats/vbyte and ran up to 500sats/vbyte) this gets really expensive. That $17m could quickly turn into $50m….

Many Bitcoin users may face similar predicament if Bitcoin fees go higher. Imagine you are the dutiful Bitcoiner who only DCAs $50 every week and withdraws directly to self custody. At 500 sats/vbyte, a Bitcoin transaction could cost close to $30-40 depending on it’s type. That die-hard Bitcoiner who’s been DCAing $50/week since 2018 now finds that if they have not consolidated their UTXOs, they now face a significant haircut of half a decade of DCAing! They could lose over 50% of their entire Bitcoin stack just to send their Bitcoin.

As a point of reference, our internet analysis shows that around 7sats/vbyte it does not make economic sense to consolidate UTXOs around 500-600 sats, which is around the Segwit dust limit of 546sats. We’re already well above that with the current fee rate. Hundreds of Bitcoin equivalent in dust/small UTXOs <10,000sats

Hundreds of Bitcoin equivalent in dust/small UTXOs <10,000sats

With fees heating up, these issues could become pretty dire for some users. Exchanges may have to start passing along Bitcoin withdrawal fees to users. Public mining companies may face scrutiny over their UTXO set in disclosures. Bitcoin DCA tools may need to aggressively educate users to avoid blowback.

Bitcoin’s success at generating a fee market would solve a lot of problems and create a few new ones. We’re just trying to stay ahead of the curve in identifying which ones those are.

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