How can I measure cost savings from consolidation transactions?

Question

One of the techniques to save fees is doing consolidations. According to https://en.bitcoin.it/wiki/Techniques_to_reduce_transaction_fees: "if your usual target feerate during normal-priced fee periods is 100 nanobitcoins per vbyte and the current feerate is 10 nanobitcoins per vbyte, you could save up to almost 90% on fees by consolidating now before you next need to spend some of those inputs."

However, this is under the assumption that your coin selection strategy will only spend low value UTXO at a high fee rate (which isn't optimal to begin with).

It seems hard to measure the the cost savings because it's hard to predict when the UTXO would have been spent in the future. One way to measure the "savings" is by comparing spending the UTXOs at the time of consolidation vs at the time of spending the consolidation transaction. One can measure if the consolidation transaction was profitable. However, this metric seems misleading because those same UTXO's could have been spent sometime later under a different fee rate.

Is it impossible to have an accurate measurement of fee savings from doing consolidation transactions?

Answer 1

You could simulate a wallet that did not perform the consolidations but kept the original UTXOs and see what you would have spent on fees sending and receiving the same payments at the same feerates that your actual wallet performed. Since there is an element of randomness to some wallet’s coin selection methods, you may want to repeat this random walk multiple times.

I think it would be difficult to more accurately measure the “what-if” otherwise, since the consolidation transactions inherently change the outcome of the subsequent wallet history.

However, this is under the assumption that your coin selection strategy will only spend low value UTXO at a high fee rate (which isn't optimal to begin with).

More precisely the benefit of consolidating is based on the expectation that you will need to spend multiple instead of a single UTXO at a high feerate, and consolidating them will provide you with sufficient funds in a single UTXO so you can spend the many UTXOs at low feerates and a single UTXO at high feerates which overall costs less than the multiple UTXOs at high feerates.

If you actually end up being able to create transactions at a low feerate over a longer period of time, you can save fees by just spending the UTXOs directly and leveraging the variety of amounts to create changeless transactions.

One problem that some users looking into consolidation overlook is that excessive consolidation can actually increase your cost. When I have previously implemented consolidation strategies for enterprise wallets, I recommended that they only consolidate UTXOs when they had accumulated more than e.g. 200 that were older than 2 weeks that were below their usual spending amounts. I wrote about some of our experiences in this blog post.