Crypto selection News & insight Cambridge Judge Business School

Transaction output has a value field, which indicates the value contained in the transaction output and occupies 8 bytes. The unlocking and locking scripts are used respectively to prove that the input UTXOs are owned by the payer and that the output UTXOs are locked to the beneficiary. The study is designed to provide a guide to which crypto assets may become more widespread over time. Based on these modeling scenarios, “we are able to predict the subset of the most widely adopted crypto assets and their features,” the study says. The Bitcoin UTXO selection method makes up to 2000 attempts(each attempt is called a ’round’) to find a near optimal combination of input UTXOs.

The Multicriteria Model

• Bitcoin addresses are equivalent to accounts in traditional financial systems, but addresses are not linked to the actual social identity, which protects the privacy of users.
• A well-designed coin selection algorithm can accomplish multiple optimization objectives while reducing the administrative cost of the system.
• Bitcoin is a decentralized application that uses the UTXO model, in which UTXOs are consumed as transaction input and created by transaction outputs.
• The proposed method employs the Branch’n’Bound algorithm to seek an exact match of the target value and falls back on the Random Draw if it fails to find an exact match.
• There exist an abundance of techniques for multi-objective optimization, some recent ones include particle swarm optimization 21 and deep reinforcement learning 22.

While illustrating the difficulty of the network’s global maintenance due to its complexity, the research paper highlights potential percussions of the existing shortcomings of the current coin selection methods. Our work answers the concerns brought to light, proposing a coin selection method that disincentivizes dust creation whilst enhancing the overall performance in the context of UTXO-based cryptocurrencies. Each transaction has a version number, transaction inputs number, several transaction inputs and outputs and lock time.

Conclusions and Future Research

In this selection process, the basic task is to reach the amount required for this transaction. Therefore, the coin selection problem is usually interpreted as a subset-sum problem. In practice, the wallet will design its own coin selection method and the transaction fee is the main consideration when designing the coin selection algorithm. But the amount requirement and transaction fee are not the sole factors contributing to the coin selection problem. Designing an appropriate coin selection algorithm should consider utilizing dust, ensuring user privacy, accounting for specific user requirements as well as the transaction fee.

The payer can create and broadcast transactions through the P2P network without going through other third-party platforms. All transactions are stored in the block openly, transparently and distributed. Bitcoin addresses are equivalent to accounts in traditional financial systems, but addresses are not linked to the actual social identity, which protects the privacy of users. There is no relationship between the account and password in the traditional financial system, therefore the account and password are stored in the back-end database.

This strategy cannot ensure accuracy of target value matching and lack effectiveness in minimizing transaction fee. Moreover, the algorithm study investigates crypto selection used does not take into consideration change output of the transaction and therefore overlooks dust production. In 4, they quantitatively examine Bitcoin’s coin selection method in regards to dust production and observed a trend of increasing number of unprofitable UTXOs.

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• Each transaction has a version number, transaction inputs number, several transaction inputs and outputs and lock time.
• Under this premise, the method also prevents the production of dust as it prioritizes using a combination of coins that comes to the specific target amount, therefore, eliminating excessive “change”.
• Although Bitcoin’s method has the lowest minimum number of dust however the average number of dust in the Bitcoin’s method wallet is around 100.
• These complexities prove to have further ramifications when other factors are put into consideration such as transaction fees and production of dust.

Coin selection method refers to the process undergone when selecting a set of unspent transaction outputs (UTXOs) from a cryptocurrency wallet or account to use as inputs in each transaction. The most applied coin selection method that UTXO-based cryptocurrencies currently employ is an algorithm that decides on a certain set of UTXOs that matches the target amount and limits the transaction fee. However this approach trades off favourable maintenance overhead of the entire network for low transaction fees, as many low-value UTXOs known as “dust” is produced. Over time, this will impact the scalability and management of the cryptocurrency network as the global set of UTXOs become larger.

Crypto Asset Portfolio Selection

Although the method we proposed is better than the Bitcoin method in both distance and the number of UTXOs, this algorithm requires more time to solve the problem, as we discussed in section 4. From Table 2, it can be observed that our proposed method does not fall short in performance of UTXO quantity control. Hence, while hitting the target more accurately our method will not create transactions that require excessive transaction fees, this holds true stably. This performance can be clearly perceived in the graphs depicting the comparison of UTXO quantities selected by all three methods in Figs. The transaction outputs will generate new UTXOs, and the transaction inputs consume UTXOs, which are the source of coins. Bitcoin is a decentralized application that uses the UTXO model, in which UTXOs are consumed as transaction input and created by transaction outputs.

Increasing transaction fees to attract the attention of miners is not a sustainable solution with possible future consequences such as overly high fees that render more transactions economically meaningless. The method proposed in this article takes the approach of increasing the number of transactions that a block can accommodate by reducing the transaction size. In turn, the transaction fee will also be lower than before with the size reduction of the transaction. Since one user can have more than one wallet, the number of active users cannot be observed, it is also a rapidly growing number as more people become new users of Bitcoin.

Also, take notice that when large coins are spent rapidly there will be an accumulation of low value coins left that may become impossible to transact due to being lower than the required transaction fee. The integration of the greedy algorithm and genetic algorithm can formulate a solution that efficiently selects coins based on their individual values in a way to get as close as possible to the target with the least number of coins. Under this premise, the method also prevents the production of dust as it prioritizes using a combination of coins that comes to the specific target amount, therefore, eliminating excessive “change”. Miners first pack the transactions with high priority into blocks, followed by those with high transaction fees. The transactions without fees and low priority are likely to wait a long time for confirmation 14. Since Bitcoin’s mining reward is halved every four years, transaction fees will become the primary means of income for miners in the future.

The article at a glance

A well-designed coin selection algorithm can accomplish multiple optimization objectives while reducing the administrative cost of the system. Hence, we consider the coin selection problem as a multi-objective optimization problem. Amidst the abundance of research on cryptocurrencies, there are few papers on coin selection methods specifically. Thus, our review of related work looks at selection strategies that prioritize target value accuracy 17, 18, enhance the knapsack algorithm 19, and protect user privacy 20. Our work proposes a coin selection method that aims to meet the exact target requirement whilst maintaining a small and stable number of UTXO inputs, and avoiding the production of dust. This paper interprets the method through an explanation of the algorithms concerned and illustrates the effectiveness through visualized data sets from simulations.

Table 3 shows the minimum, maximum, and average of dust quantity in the three wallets in each 100 rounds. Figure 12 visualizes the dust quantity fluctuations in each wallet over 300 rounds. Overall, the selection method employed by Bitcoin prioritizes selecting UTXOs whose sum of the amount is closest to the target on a random selection recursion.