Nobody cares about avoiding small UTXOs?

Posted 5 months ago by xmrk reloaded

I have coop closed a few channels recently with relatively low peer's balance (< 50k sats). I always tried to warn the peer first that he will receive relatively small UTXO, so it will be relatively costly to redeem it. Had one case of 20k sats, redeeming it will cost around 1% of the UTXO amount if the fees stay at 4 sats/vB. And those fee levels are incredibly low if you compare it to just a few months ago. 

And people I warned didn't care, which is a bit surprising and frustrating. But maybe I am too obsessed. Or more probably it only makes sense to invest time and effort in avoiding small UTXOs if you have a large node, many channels, and many UTXOs from closed channels. 

There are few ways to avoid small UTXOs.
1. Rebalance - send funds by lightning to this channel. You can use absurdly high lightning fee and still save sats. If you begin with 20k sats in your channel, you can try rebalancing another 20k sats with lightning fee of 1000-2000 ppm (=0.1-0.2%) which will most probably succeed, so you pay 0.1-0.2%, and thus you reduce your UTXO redeeming fee from 1% to 0.5%.
2. Run peerswap and do a liquid swap-in, typically costs around  400 sats, depends on number of liquid UTXOs you are redeeming. Only makes sense if you already have some L-BTC, you can swap them for real BTC (you get BTC via lightning in the channel, but we suppose this channel is going to be closed) and only pay this 400 sats Liquid on-chain fee. Note that peg-out normally costs you 0.1% of the amount + on-chain fees, so with peerswap you avoid this 0.1% fee.
3. Send your funds directly to some custodial wallet when closing the channel - specify  custodial wallet's deposit address as your delivery address  (option --delivery_addr of lncli closechannel). Yes, custodial is ugly and they can steal or shotgun-KYC you, but we are talking about small amounts. Another problem is that you just throw the hot potato - small UTXO - to the custodial wallet, they have to redeem it and pay the fee.
4. Send your funds directly to liquid peg-in address (I tried, it works) - the disadvantage here is that the peg-in address is "multisig" address which is larger, you will have somewhat bigger closing tx. 

Note that your balance cannot go lower than 1% of the channel capacity, and if you are under 1%, you can only go up, not down. 

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