Proposal: Unlocking Dust UTXOs as Miner Transaction Fees

[Nighttime Satoshi]

Dear fellow Bitcoin developers,

I'm excited to share a proposal addressing a long-standing Bitcoin challenge: economically unviable dust UTXOs.

As Bitcoin's value and transaction fees increase, more UTXOs become effectively unspendable because the cost to move them exceeds their value. This creates a growing dust horizon - small amounts of BTC permanently stranded from circulation, weakening fungibility and bloating the UTXO set.

I'm proposing a solution that enables users to voluntarily designate their dust UTXOs as transaction fees through cryptographic authorization, allowing miners to claim them directly without requiring traditional spending. This is a win-win-win solution for users (reclaiming otherwise stranded value), miners (additional fee income), and the network (reduced UTXO set size).

Key Features:

1. Entirely Voluntary - Users must explicitly authorize any dust UTXO transfer with cryptographic signatures proving ownership
2. Implementation as Soft Fork - Backward-compatible with non-upgraded nodes
3. Simple Security Model - Uses familiar signature verification without exposing private keys
4. Clearly Defined Dust Threshold - Fixed at 546 satoshis, matching Bitcoin Core's existing dust limit
5. Race Condition Prevention - Comprehensive safeguards against double-spend and miner race conditions
6. Minimal Consensus Impact - Carefully designed to introduce minimal complexity to Bitcoin's validation logic

Economic Benefits:

1. UTXO Set Cleanup - Removing millions of dust UTXOs could significantly reduce the UTXO set size
2. Enhanced Fungibility - Provides a pathway for stranded satoshis to rejoin economic circulation
3. Long-term Miner Incentive - Creates an additional fee source as block rewards diminish
4. Complementary to Existing Solutions - Works alongside batching, consolidation, and Lightning Network

Technical Implementation:

The proposal uses a special OP_RETURN output format in transactions to designate dust UTXOs for miner claiming:

OP_RETURN <DUST_FEE_PREFIX> <dust_utxo_txid> <dust_utxo_vout> <signature>

Miners can claim these UTXOs in their coinbase transaction if and only if the corresponding designation transaction is included in the same block.

Historical Context & Contributions:

It seems that previous discussions on dust UTXOs have considered many approaches, including forced reclamation. This proposal avoids those controversies by requiring explicit user authorization while still providing an economically rational path for dust cleanup.

You can read the full proposal draft here: https://github.com/satoshinotebook/BIPs/blob/main/unlocking-dust-utxos-as-transaction-fees.md

I'd appreciate feedback on:

1. Technical feasibility of the soft fork implementation
2. Security considerations and potential edge cases
3. Economic incentive alignment
4. User experience concerns for wallet implementations

Thank you for any feedback! I believe it offers a practical solution to a growing challenge that will only become more significant as Bitcoin continues to mature and evolve.

With respect,

Nighttime Satoshi

nighttim...@gmail.com

https://satoshinotebook.com

[Light]

Hi Nighttime,

Several questions come to mind:

1. Why fix the limit at 546 sats? Why not allow any UTXO to be spent this way?

2. What about "dust" UTXOs owned by scripts rather than keys? e.g. multisig

3. The size of this OP_RETURN output could be a barrier, both technical and economic:

Technical: Based on the metadata contained in this output, this may be larger than the current 80-byte OP_RETURN standardness limit. Is that correct? If so, does this imply a need to increase this standardness limit, or require an assumption that the user will find their own way to circumvent this limit? e.g. using Libre Relay

Economic: Depending on the size of this OP_RETURN output and the current market fee rate, the value of the dust may still be uneconomical for the miner to claim. For example, if the OP_RETURN output is 100 vB and the current fee rate is 6 s/vB then a 546 sat dust output will not be economical for the miner to include in their block.

4. Given the above considerations, I wonder how this proposal is an improvement over the status quo at all. Does this method of spending a UTXO via OP_RETURN actually save any onchain bytes relative to "traditional spending"? And even if it does result in onchain byte savings in some or all cases, is it really worth all of the effort of a soft fork and wallet updates etc to allow them to become spendable this way if economic realities could make them uneconomical to spend anyways should we permanently transition to a paradigm of sufficiently high fee rates?

Regards,

Light

On Sat, Mar 8, 2025, at 1:23 PM, Nighttime Satoshi wrote:
> Dear fellow Bitcoin developers,
>
> I'm excited to share a proposal addressing a long-standing Bitcoin
> challenge: economically unviable dust UTXOs.
> As Bitcoin's value and transaction fees increase, more UTXOs become
> effectively unspendable because the cost to move them exceeds their
> value. This creates a growing dust horizon - small amounts of BTC
> permanently stranded from circulation, weakening fungibility and
> bloating the UTXO set.
>
> I'm proposing a solution that enables users to voluntarily designate
> their dust UTXOs as transaction fees through cryptographic
> authorization, allowing miners to claim them directly without requiring
> traditional spending. This is a win-win-win solution for users
> (reclaiming otherwise stranded value), miners (additional fee income),
> and the network (reduced UTXO set size).
>

> Key Features: 1. *Entirely Voluntary* - Users must explicitly authorize

> any dust UTXO transfer with cryptographic signatures proving ownership

> 2. *Implementation as Soft Fork* - Backward-compatible with
> non-upgraded nodes
> 3. *Simple Security Model* - Uses familiar signature verification
> without exposing private keys
> 4. *Clearly Defined Dust Threshold* - Fixed at 546 satoshis, matching

> Bitcoin Core's existing dust limit

> 5. *Race Condition Prevention* - Comprehensive safeguards against

> double-spend and miner race conditions

> 6. *Minimal Consensus Impact* - Carefully designed to introduce

> minimal complexity to Bitcoin's validation logic

> Economic Benefits: 1. *UTXO Set Cleanup* - Removing millions of dust

> UTXOs could significantly reduce the UTXO set size

> 2. *Enhanced Fungibility* - Provides a pathway for stranded satoshis
> to rejoin economic circulation
> 3. *Long-term Miner Incentive* - Creates an additional fee source as
> block rewards diminish
> 4. *Complementary to Existing Solutions* - Works alongside batching,

> consolidation, and Lightning Network
> Technical Implementation:
> The proposal uses a special OP_RETURN output format in transactions to
> designate dust UTXOs for miner claiming:
>
> OP_RETURN <DUST_FEE_PREFIX> <dust_utxo_txid> <dust_utxo_vout> <signature>
>
> Miners can claim these UTXOs in their coinbase transaction if and only
> if the corresponding designation transaction is included in the same
> block.
>
> Historical Context & Contributions:
> It seems that previous discussions on dust UTXOs have considered many
> approaches, including forced reclamation. This proposal avoids those
> controversies by requiring explicit user authorization while still
> providing an economically rational path for dust cleanup.
>
> You can read the full proposal draft here:
> https://github.com/satoshinotebook/BIPs/blob/main/unlocking-dust-utxos-as-transaction-fees.md
>
> I'd appreciate feedback on:
>

> 1. Technical feasibility of the soft fork implementation
> 2. Security considerations and potential edge cases
> 3. Economic incentive alignment
> 4. User experience concerns for wallet implementations

> Thank you for any feedback! I believe it offers a practical solution to
> a growing challenge that will only become more significant as Bitcoin
> continues to mature and evolve.
>
> With respect,
>
> Nighttime Satoshi
>
> nighttim...@gmail.com
>
> https://satoshinotebook.com
>
>

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[Nighttime Satoshi]

Hi Light,

Thanks for the thoughtful questions!

1. The 546-satoshi threshold isn't intended to be permanently fixed in the protocol. I used this value as it matches Bitcoin Core's existing dust threshold for P2PKH outputs. I further noted in the proposal that a dynamic threshold would be more appropriate than a fixed one, since the dust threshold naturally fluctuates with network conditions. Wallet softwares could calculates what qualifies as "dust" based on current mempool conditions. And you are correct - users can designate any UTXO, but economically rational users will only choose those below the spendable threshold. This approach maintains my proposal's focus on economically unviable outputs while allowing flexibility as network conditions evolve.

2. Great point. I focused on simple key-controlled UTXOs (P2PKH, P2WPKH) for a couple of reasons: 

• They're straightforward to verify with a single signature
  
• They represent a significant portion of dust UTXOs
  
• Extending to complex scripts would substantially increase implementation complexity
  

I deliberately targeted simple script types for the initial implementation to keep the proposal focused and feasible. However, future extensions could add support for multisig and other script-based dust once we establish the basic mechanism and validate its effectiveness.

3. You're right that the metadata requirements (txid: 32 bytes, vout: ~1-4 bytes, signature: ~64 bytes, prefix: ~7 bytes) has the risk of exceeding the standard 80-byte limit. If this is the case, we could use SegWit witness data instead of OP_RETURN. A new witness version could efficiently encode this information, drastically reducing on-chain bytes, or Implement Schnorr or aggregated signatures to reduce signature size. Economically, this would significantly reduce the transaction weight, making it viable even during periods of higher fees. Users would still only designate dust UTXOs when it makes economic sense based on current fee rates. I mentioned in passing these alternative methods in the proposal but I should clarify them as main solutions instead.

4.Does this method actually save any onchain bytes relative to "traditional spending"?  - The proposal is less about byte savings (though I do think it offers benefits to it):

Traditional spending of a dust UTXO requires:

Input data (~148 vB for legacy inputs, ~68 vB for SegWit inputs)
Output data (~31 vB per output)
Transaction overhead

My mechanism removes the need for users to include the full input scriptSig/witness data since miners claim the UTXO directly in their coinbase transaction. This is particularly efficient when users designate multiple dust UTXOs in a single transaction.

5. Is it worth a soft fork? I believe it is, for several reasons:

The problem of Bitcoin dust is a growing issue - especially as adoption and price grows.
It unlocks value currently trapped in dust UTXOs without requiring users to pay upfront fees
It provides miners with an additional revenue source, which becomes increasingly important as block rewards diminish
It efficiently cleans up the UTXO set, addressing a long-term scalability concern
It improves Bitcoin's fungibility by providing a path for stranded satoshis to rejoin economic circulation

I should clarify an important aspect: when miners "claim" dust UTXOs, these UTXOs are permanently destroyed, not retained in their original form. Their value is transferred directly into the miner's coinbase output as newly spendable satoshis. This permanent removal of unspendable UTXOs from the set is a key benefit.
This mechanism is specifically limited to miner coinbase transactions because:

Coinbase transactions already have special consensus rules that allow them to create outputs without standard input validation
Restricting to coinbase transactions greatly simplifies security considerations
Extending this capability to regular transactions would introduce significant risks and complexities

Neither Lightning nor existing wallet techniques can economically address truly unspendable dust UTXOs without user-paid fees.

Let me know what you think of these.

Warm regards,, 

Nighttime

[Pieter Wuille]

Hello,

This is not a soft fork, for two reasons:

* Coinbase transactions can only have exactly one input. I don't think there is a particularly good reason for this besides simplicity, but that is the current rule. Allowing a coinbase transaction to additionally also spend certain outputs would require a hardfork.

* The outputs being marked as dust are not allowed to be spent by miners. Changing this requires a hardfork as well. Think about it: if this was possible with a softfork, it must mean that doing what you're proposing would *already be legal* today, and thus not need this proposed change in the first place. Softforks can only outlaw formerly legal behavior.

Furthermore, I don't really see the point. The proposal requires both a coinbase txin to spend the coin, plus a signature in a separate transaction, in the same block. To pay the miner for the opportunity cost of not including normal transactions with these bytes, the fee for this OP_RETURN output should economically be priced at the block's feerate for the size of the OP_RETURN output *plus* the cost of the coinbase transaction input. Together, they are no smaller (and with witness discount, I suspect larger) than the user just spending their "dust" output, and thus the fee for using this OP_RETURN-based mechanism would be larger than the value of the dust output.

--
Pieter

[Nighttime Satoshi]

Hi Pieter,

You're absolutely right. You've raised valid technical concerns about my original proposal regarding coinbase limitations and soft fork requirements. Based on your points, I've reconsidered the implementation approach to ensure it works as a proper soft fork. Here's the revised mechanism. I'm curious to hear your thoughts:

The basic premise is that dust UTXOs are a deadweight loss to the Bitcoin Network - and we must find a solution at the L1 level that can "revive" these dust satoshis back into the network at their full value, in order to improve Bitcoin's fungibility. This dust problem will only get more significant, and I don't think the deflationary effect of lost satoshis is more valuable than the prospect of full fungibility. L2 solutions are a bandaid. 

Amendments:

1. Coinbase Transaction Inputs:

Concern: Coinbase transactions can only have exactly one input. Allowing coinbase transactions to spend additional outputs would require a hard fork.

Revised Solution: What if miners claim authorized dust UTXOs through entirely separate, regular, standard-format transactions? Though not economically feasible for single transactions, it becomes extremely beneficial economically when batching multiple dust UTXOs simultaneously, significantly amortizing transaction overhead across many claims. Coinbase transactions remain exactly as they are today, retaining their single-input rule and current consensus constraints.

2. Spending Dust Outputs Without Original Conditions

Concern: The dust outputs marked for claiming by miners can't currently be spent without fulfilling their original conditions, which would require a hard fork to change.

Revised Solution: What if miners are permitted to spend dust UTXOs without their original conditions only under strictly defined new rules:

* The dust UTXO must be explicitly authorized for miner spending through an OP_RETURN-based "Dust Fee Authorization" (DFA) transaction.

*The miner’s transaction claiming this dust must occur in the exact same block as the DFA transaction.

*Only dust UTXOs below a clearly defined threshold (546 sats) are eligible.

These new consensus rules strictly restrict previously impossible spending conditions, making it unequivocally a valid soft fork. No previously illegal behavior is permitted without new restrictive conditions explicitly met.

3. Economic and Practical Viability

Concern: The economic overhead (OP_RETURN transaction plus coinbase input overhead) might be larger than simply spending the dust normally.

Revised Solution: With coinbase inputs no longer altered, the overhead is significantly reduced. Furthermore, the revised mechanism explicitly encourages batching multiple dust authorizations into a single DFA transaction, dramatically amortizing overhead costs across many dust UTXOs. This batching substantially improves economic viability, especially during periods of lower mempool congestion where fees are minimal.

Does this design address your concerns while preserving the original goal of voluntary, secure, and economically rational reclamation of dust UTXOs?

Your insights have been invaluable. I'm eager to receive any further feedback on this revised design.

Thank you again for your careful review and helpful critique.

Best regards,

[Garlo Nicon]

I wonder, why OP used so much of AI-generated content to make these posts.

> What if miners claim authorized dust UTXOs through entirely separate, regular, standard-format transactions?

They can do that today, no changes are needed. Just sign any dust with SIGHASH_NONE | SIGHASH_ANYONECANPAY, or even use SIGHASH_SINGLE bug, to spend all coins from the same public key, with the same signature.

> What if miners are permitted to spend dust UTXOs without their original conditions only under strictly defined new rules

Then it is still a hard-fork. But your AI model probably cannot understand it.