What Is Coin Control?
Coin Control is a privacy enhancing wallet feature that enables manual control of which UTXOsWhat Is A Bitcoin UTXO? UTXO is short for unspent transaction output and is any particular fraction of a bitcoin that has not been spent. A single UTXO can hold... (unspent transaction outputsWhat Are Inputs & Outputs? Every bitcoin transaction is made up of inputs & outputs. Inputs are bitcoin being sent and outputs are bitcoin being received. Until bitcoin is sent...) you send in a Bitcoin transactionWhat Is A Bitcoin Transaction? A Bitcoin transaction is the transfer of bitcoin from one address to another address or when new bitcoin is created. Transactions can also be the.... This can be useful for a number of reasons, such as preserving on-chain privacy, minimizing address clustering, preventing mixing private UTXOs with KYCWhat Is KYC? KYC, short for Know Your Customer or sometimes Know Your Client, is a legally required process that banks, bitcoin exchanges, and other financial institutions use to verify... UTXOs, limiting peeling chainsWhat Is An Address Cluster? A Bitcoin address cluster is a collection of Bitcoin addresses that are linked to each other by multiple inputs merged in a single transaction or..., avoiding dusting attacks, and paying a lower fee rateWhat Is The Fee Rate? The fee rate for a Bitcoin transaction is the number of sats a sender is willing to pay for each byte of on-chain transaction data.... when sending transactions.
Why Does Coin Control Matter?
By default, most wallets will automatically select UTXOs for you when sending a transaction. Some wallets may use a first in first out (FIFO) system and automatically send your oldest UTXOWhat Is A Bitcoin UTXO? UTXO is short for unspent transaction output and is any particular fraction of a bitcoin that has not been spent. A single UTXO can hold... first. However, this can lead to you unintentionally consolidating UTXOs (and their respective history), which can jeopardize your privacy by unintentionally giving away valuable information about your bitcoin holdings.
By manually selecting UTXOs, users can help to prevent their transactions from being traced by chain analysis companies and other bad actors. In addition, coin control can also help to reduce on-chain fees by enabling users to select the smallest number of UTXOs to build transactions with in order to keep transaction data as low as possible.
Minimizing Address Clusters
One way that malicious actors (usually a government or chain analysis company) de-anonymize Bitcoin users is by analyzing address clusters. Address clusters are formed when UTXOs from multiple addresses are merged to generate the outputs in a transaction. This is generally indicative of one person or entity controlling those addresses. By identifying address clusters, it becomes easier for chain analysis companies to track Bitcoin users and collect info on what addresses they own.
When using coin control, a Bitcoin user can select which UTXOs they use to fund a transaction. This selection process helps to minimize address clusters, making it more difficult for chain analysis to deanonymize Bitcoin users.
Keeping Private UTXOs Private
Coin control can also be helpful in preserving the fungibility of bitcoin by preventing private UTXOS from being mixed with KYC UTXOs.
In the event that you are able to stack satsWhat Is A Satoshi? A Satoshi (sat or sats for short) is the smallest unit of a bitcoin. 1 Satoshi is a hundred millionth of a BTC (1 sat =... without having to provide your personal information via KYC, you want to make absolutely certain that you don’t send private UTXOs in the same transaction as any KYC UTXOs. The common ownership heuristic provides a reasonable level of certainty that all of the UTXOs within a transaction belong to the sender. If even a single UTXO being sent (input) has been KYC’d, then the privacy benefits of any of the private UTXOs have been compromised.
The only way to prevent private UTXOs and KYC UTXOs from being used in the same transaction is to use coin control to keep them separate.
Limiting Peeling Chains
Peeling chains are sections of the blockchainWhat Is The Blockchain? The blockchain is the public record of bitcoin transactions, which are organized into blocks that are all chronologically linked to one another. Because every block is... that are all linked together through a series of multiple transactions with a small number of inputsWhat Are Inputs & Outputs? Every bitcoin transaction is made up of inputs & outputs. Inputs are bitcoin being sent and outputs are bitcoin being received. Until bitcoin is sent... instead of a single transaction with a large number of inputs.
When a UTXO is spent and generates change, that change output is often merged with another input in a later transaction. If that new transaction also generates change, that new change output is likely to be merged with another input in yet another future transaction.
This cycle of merging 2 or more smaller UTXOs through a series of transactions is a peeling chainWhat Is An Address Cluster? A Bitcoin address cluster is a collection of Bitcoin addresses that are linked to each other by multiple inputs merged in a single transaction or.... If UTXOs within a peeling chain are a combination of both private and KYC UTXOs, then any private UTXOs used in the chain are compromised since they have been cryptographically linked to KYC UTXOs within the peeling chain.
Until multiple CoinJoinWhat Is CoinJoin? CoinJoin is a type of privacy-enhancing Bitcoin practice that groups multiple UTXOs (inputs) together and spends them with other users' transactions, making it more difficult to know... methods become the standard for all wallets, the best way to combat chain analysis and limit peeling chains is to use coin control to completely avoid using private UTXOs with KYC UTXOs.
Avoiding Dusting Attacks
Coin control can also help you to avoid dusting attacks. A dusting attack is when someone (usually a government or chain analysis company) tries to break down on-chain privacy by sending a tiny amount of bitcoin to a large number of previously used addresses. Each one of these tiny “dust” UTXOs is almost impossible to spend without also spending other UTXOs in the same transaction. Since many wallets automatically select which UTXOs are used for transaction inputs, many of these dust UTXOs are all linked together when a user sends a transaction. When this happens, all of the sending addresses are linked together which can potentially deanonymize the owner of the addresses.
By using coin control, a user can avoid dusting attacks, as they can simply choose not to spend using the dusted addresses.
Reducing On-Chain Fees
Coin control is also one of the ways that bitcoin is scaling by helping to reduce on-chain fees. Since bitcoin transaction fees are based on the amount of data in a transaction rather than the amount being sent, using fewer inputs and outputs requires less block space and tends to result in paying a lower fee rate.
By using coin control, you can ensure that your transactions use the fewest number of inputs possible which helps to preserve your on-chain privacy and pay a lower fee rate.
Overall, coin control is an important privacy-enhancing technique that all Bitcoin users should be aware of. By using coin control, Bitcoin users can preserve on-chain privacy, minimize address clustering, avoid mixing private UTXOs with KYC UTXOs, limit peeling chains, avoid dusting attacks, and reduce on-chain fees.