📖 Episode Transcript

Cody Ellingham (00:13.834)
Hello, I am Cody Ellingham and this is the Transformation of Value, a place for thinkers and builders, where together we ask questions about freedom, energy and creativity through the lens of Bitcoin.

Today I'm joined by Brandon Boucher, co-founder of Lightning Pay, who I think are New Zealand's best Bitcoin only brokerage. Brandon is also very active in Bitcoin education in New Zealand, and we ask the question, what is a Bitcoin UTXO? Is this something you're familiar with? UTXO stands for Unspent Transaction Output, and they are one of the fundamental pieces of Bitcoin.

What is the importance of UTXO management and what do we need to know to make sure that your Bitcoin today is managed effectively to ensure that you can use it in the future? I would like to know what you think. Send me an email at hello at the transformation of value dot com and I will get back to you. Now, if you enjoy this episode and the work I'm doing, please consider a value for value donation through my website or directly to the show's Bitcoin wallet. Otherwise, on to the show. Brandon, how have you been? Been pretty good, man.

It's a beautiful day outside. School holidays have just started. So got the kids at home looking forward to a good summer. Enjoying the Kiwi summer. Yeah, absolutely. Yeah. How's things been going with Lightning Pay? Things are great at Lightning Pay at the moment. Yeah, we're feeling pretty good about the progress and traction we're catching on right now. You know, month after month, things are looking up. Obviously the price of Bitcoin helps with that a little bit. Moving things forward, but...

We've also recently won some awards, a start-up of the year for the local Web3 group, which is really cool to get some recognition for what we're doing in these early days. Also getting into an accelerator program and meeting some really cool people that are helping us out with some things that we're not always experts in everything. seeing that forward has been good too.

Cody Ellingham (02:21.746)
Things are great. I'm really looking forward to what we can get done over the next few months too. We've got some big plans and yeah, hoping we can start introducing people to the Bitcoin way rather than what they've been used to here in New Zealand for the last handful of years. Yeah. You mentioned the Accelerator program. Is that something you can share more of at the moment? Yeah, sure. Absolutely. So we were accepted into the Ministry of Awesome Found a Catalyst program. So the Ministry of Awesome is

pretty well recognized as the top founder support program here in New Zealand. And the Founder Cattle's Program specifically is a founder-focused program that essentially is focused on providing support to the people working in the business as founders. So we have a headline, I don't know, to call him a coach, a person from the industry who's awesome, who's helping us out, he's been great.

But along the way we can get connected with expertise in various different fields that sort of can help us answer our questions, strategy questions, marketing questions all the way down to what we should be thinking about from here. So it's been really useful so far. Yeah. Is that Ministry of Awesome? So tell me bit more about that. I hadn't heard of that. Is that a relatively new program or has that been around for a while? I'm actually not sure how long they've been around to be awesome. had heard, or to be honest, I haven't heard of them before I started.

you know, started at Lightning Pay. But I did hear of them, you know, pretty early on in that journey, as we were looking around for, you who we might get some support from. But they're pretty well known and, you know, in founder circles, at the very least. so that's, I'm not sure about their longevity or tenure, but yeah, they're pretty well recognized as a great group. so the program we got into is very competitive. So they only bring in a handful of companies.

for each cohort and the applications are in the hundreds. So it's a pretty good program to give you a part of. Yeah, that's excellent. Well, congratulations on that. I think New Zealand has some excellent support for startups and innovation and even just via government support as well, things like Callahan Innovation. Yeah, I mean, there's quite a bit of that. With Callahan also, particularly in our early days, the Web3 group that we got that award from

Cody Ellingham (04:45.55)
Just the other day, Web3NZ is a part of Callahan Innovation sponsored group. Kevin in particular, leading that group has been really supportive of us early on as we got started and helping us out and just pointing us at different advice and directions. So, yeah, we found quite a bit of support as we've gotten going here.

Yeah, yeah, Kevin's pretty awesome and the whole crew there at Web3NZ. But Brandon, something I wanted to dive into today with you, if it's okay, is really the conversation about UTXOs. And I know you've been writing a little bit about this on the Lightning Pay website recently. And I'm going to put you on the spot a little bit and maybe start off if we can define a UTXO for people who may not know what it is, maybe how people can understand it, if that's okay, please.

Yeah, we'll give the proper definition. So UTXO stands for unspent transaction output. It's a feature or term that applies to Bitcoin's base layer. So it's traditional on-chain footprint is a pile of UTXOs. What a UTXO actually is, is a representation of an amount of Bitcoin that you might own and ownership being derived from

your private key has permission to sign away ownership of that UTXO. So that's sort of the high level, you know, less clear concept, but essentially the best description of UTXO is it's the pieces of Bitcoin that are assigned to an address you own that you can then spend later. People look at their wallets and they think there's a balance there that I have, you know, 10 million sats or 0.1 Bitcoin, but in reality,

What you have if there's multiple transactions is a number of smaller pieces of Bitcoin, smaller UTXOs that make up that balance. So you can think of them like bills of cash in your wallet. So when you open your wallet, you might have $20, that might be denominated in 10 and two fives. And that's ultimately what a UTXO represents is those pieces of Bitcoin that you can spend out of a traditional wallet. that's the best description that...

Cody Ellingham (07:08.312)
that gets people head wrap around the idea. Yeah. And it's important though to distinguish this as separate from a Bitcoin wallet address as well, right? that's right. I you could have multiple UTXOs attached to a single address or you can have a UTXO attached to separate multiple UTXOs attached to separate addresses. This is this address is a a, you know, it's a representation of your private key, but

like the better way to put it is it's a place where you can assign a UTXO from a previous transaction. So if someone's sending you a transaction, they can put the UTXO assigned to your address. So that's a representation of your ownership is essentially what the address represents. But the UTXO is the piece of Bitcoin that's been assigned to that address. So that's kind of a separate concept. Yeah. And something you said is effective UTXO management.

is an essential part of being a responsible Bitcoin holder. And I think this is maybe really the crux of what I want to talk about today because there are other aspects of the self-sovereign stack for Bitcoin, including things like running your own node and that. But really one of the maybe most critical pieces is this idea that you need to manage your UTXOs, which perhaps isn't that well known amongst general Bitcoin holders or people who may be new to Bitcoin. So I thought we could expand a little bit more on

on kind of what the challenges are and why we need to be looking at this, no matter who we are within the Bitcoin space. Yeah, I mean, it's a sort of bold statement about UTXO management being important for a responsible Bitcoin holder, but it's true, just to a large extent. the truth, though, the problem extends from the fact that in early days of Bitcoin, even just a few years ago.

This wasn't really a problem that we had to consider in an acute sense, right? The UTXO, in almost any denomination, if you're paying fees of one sat per VBite and Bitcoin's only a few thousand dollars or something, means that you don't really have the constraints that are starting to develop now around UTXO management.

Cody Ellingham (09:31.18)
It's sort of a call out for people to take it seriously and think about how they're actually managing their Bitcoin. And this extends not just beyond managing the UTXOs that you have in your wallet, but also setting up a strategy that can carry you forward into the future. Setting up a strategy meaning there's a large difference between the stack you hold in cold storage and how you might want to set that up for future spending or just storage.

and how you might use Bitcoin on a day-to-day basis. Already though, it's becoming a little bit constrained or there's a reasonable amount of friction about using on-chain Bitcoin on a day-to-day basis for amounts that are less than 10 New Zealand dollars. That's already a constrained situation. One of the things that comes about here is that for a lot of how

people get introduced to this, they're introduced to it through their friendly neighborhood cryptocurrency exchange that's managing thousands of different currencies. And they're all using either UTXO model, but they're all using an address model that's very similar. This isn't something that is a day-to-day concern there, and it's not something that's going to be taught to people. But if you're a saver, you're dollar cost averaging into Bitcoin $100 at a time, this can become an issue.

And so it's something that I'm trying to write a lot about on our website, Lightning Pay, because that's part of why Lightning Pay is named what it is, but also built the way that it is. It's Lightning First. And that's because I think retail going forward, retail being sort of just a catch-all term for the average person, is really eventually only going to engage in smaller denominations.

on layers that are not the base layer. And as we move forward into that future, you just need to consider what that looks like, I suppose. Yeah. Yeah. So there's just a couple of things in there as well. You mentioned the Sats per Vbyte, which again, might be something that people are not super aware of. And sometimes it gets hidden away. It sort of gets labeled as some sort of network fee or as a transaction fee if you're buying from other exchanges and these kinds of things.

Cody Ellingham (11:57.452)
And so just diving into that, what is Sats per VBite and how does that relate to UTXOs? Yeah, sure. So when I mentioned Sats per VBite, I was talking about the fee rate of on-chain Bitcoin. So every time that you make a transaction on Bitcoin's base layer, you're going to take one or more of your UTXOs and you're going to sign a transaction.

that spends those UTXOs, which essentially makes them disappear from the network, right? Spends them and creates new ones in the same amounts. The fee rate applies to the whole transaction, right? The fee rate is applied to how much information is in your transaction. So this can be affected by...

the number of inputs or the number of UTXOs that you use, the number of outputs or the number of UTXOs you're creating for someone else, for yourself, you know, whatever that transaction is trying to get done. And it's just a multiplication factor. if you have a large transaction, and it's also impacted by the number of signers you might have. So typically in a Bitcoin transaction, there's just one key sign in that transaction, but you might have a two of three multi-sig, you might have something else.

So those are all factors that go into how large the transaction is. So you multiply the sats per V byte by the number of V bytes or the size of that, the size of the data package in that transaction, and you get a fee rate or a fee for that transaction. The actual fee rate though, is dynamic. It's dynamic because, well, that's the way Bitcoin works, but it's dynamic because that's how we know

That's how we can give miners a signal that this transaction should be applied to the next block or the blocks after by applying a higher fee rate than the people that are around me are competing for that same block space. Ultimately, that's what it comes down to is that the block space that we have in Bitcoin on the first layer is not infinite. It's constrained and it's constrained for a reason.

Cody Ellingham (14:09.704)
And in order for us to sort of order transactions and determine what's going to actually make it into the Bitcoin blockchain, we have a dynamic fee rate where you can apply a fee that gives miners a reward for including your transaction. So that's per V by the essentially representation of how valuable your transaction will be to include in the next block or blocks afterwards in comparison to the other transactions that are waiting. Yeah. And so that's

Putting some numbers to this, I was just doing a bit of research before as well myself, but in really, really quiet times, you can get as low as one, two or three sets per VBITE. We do come across that every now and then. I mean, if we take a very small amount, something like a one set per VBITE fee with a very simple transaction, I worked it out. It's going to to send one UTXO.

to somebody else. And then you're going to get maybe a little bit of change back on that. I think you're looking at about 140 sets to make that transaction. Does that sound about right to you? In the very simplest terms? Yeah, that's that sounds about right. Yeah. So there's a bit of overhead. And then there's the signing that you've got to sign the transaction. There's a few things within that. But at the very least, that's what you're looking at. And you've got some figures in an article that you wrote, just examining what that means, because that's a very

Best case, perhaps one of this, don't know, actually I don't know even on a technical level, can you go below one set per V-byte, is that? No, I think so. don't think that's possible, is it? So that's really the minimum you're looking at. And if you're looking more realistically, I don't know what the mempool is saying right now, but depending, again, depending on the time of day, depending on what's happening, that V can go up very high. And early 2024, we had 200 sets per V-byte.

in some periods there. So there was this massive change, a 200X over watt is also possible. So this sort of creates a very dynamic situation that can be quite challenging if you need to send a transaction and it's a very high fee market and you've got a small transaction because this actually takes out, if you've got a small UTXO, this is gonna take a chunk out of that, right? And eventually you might not actually have anything left over potentially.

Cody Ellingham (16:36.558)
Yep, that's right. interestingly, you mentioned that sort of minimum fee you might have in an ideal scenario. If you think about what I said earlier about some amounts being somewhat constrained already, if it's 150 Satoshi, 150 Sats to spend any transaction, these days, $1, one New Zealand dollar.

Bitcoin terms is about 550 satoshis. And so you can see how that minimum fee rate, which we haven't seen in quite a while, you know, we had a lot of craziness with fees the beginning of 2023 and back at that time, and that was when the ordinal stuff was first rolling out and all of that craziness got up to 1500 cents per VB. But ever since then, we haven't settled.

really back down. We did get there for a small amount of time in late 2023, down sort of to one, two. But really in the last six months, we've settled in at, you know, six to 14. We've set a new baseline that we're just not crossing below. And, you know, at those levels, you start creeping up against, you know, what a valuable, you know, what a minimum valuable transaction might be, right?

And as we progress with the adoption of Bitcoin, I'm not one these people that expects that we're going to see overnight fees of 500 sats per VBITE or anything like that. But there's two things to keep in mind is as adoption grows, the demand for block space should continue to grow. I know that a lot of current adoptions happening on ETFs and sort of things that don't really touch the base layer. But it almost doesn't matter that much, you know, as demand for Bitcoin as a

monetary asset and eventually demand for Bitcoin as a transactional asset continue to grow. We will see demand for that block space grow and maybe instead of a baseline of 14, we have a baseline of 30. And as that creeps up over time, know, those small UTXOs you're creating now will get eaten away each time you try to spend them. Yeah. And I think the other concept that's important to keep in mind is that you've got blocks on average coming every 10 minutes.

Cody Ellingham (18:57.654)
And so there's a fee for getting into the next block and then there's perhaps a slightly lower fee for getting into subsequent blocks. And there's this kind of spectrum of transactions that are awaiting inclusion in a block and these are sitting in the mempool, know, unconfirmed transactions. And so you often will see, and depending on what wallet you're using, you might see a couple of different options for fees that you can choose and there'll be sort of a quick.

or a high fee rate for hopeful inclusion in the next block and then subsequently lower fees for blocks after that. And so that's also something to keep in mind that there's sort of a time constraint. Because if you need something to go through right now, you've got an important transaction or there's something you need to get through and it just happens to be a very high fee rate. You can't necessarily wait. You could be stung by that, which is a consideration to keep in mind. Yep, absolutely.

Like I said, saying earlier, the feed rate is dynamic and those spikes can be short. They can be hours. They can be days, but they can also be weeks. that really hinders, if we're talking about using Bitcoin in small amounts as a transactional currency, that really hinders your ability to do that in a lot of circumstances. Maybe you want to buy something for a few hundred dollars and fee rates are really high right now.

It's a minor inconvenience to wait a few hours to make that transaction. It's a different thing if there's a lot of demand for a few weeks and now you're stuck sort of wishing and praying. Anyway, the point being that I think what we're trying to introduce at Lightning Pay, and we sort of do this all across the educational content we're creating, sort of framing Bitcoin in future terms to some degree.

Base layer transactions are okay now. They work great. They work great in reasonable amounts, right? But the way we introduced the Lightning Network, for example, is we talk about the base layer as I think what it will become, which is a final settlement for large amounts and thinking about it as the same way we think about the central bank, right? That ledger will necessarily be a very

Cody Ellingham (21:23.65)
dense ledger, every transaction will have a huge amount of economic density to it. And as we move forward, that density will have to increase in order to make those things manageable. So really, that's our introduction to why the Lightning Network is important and sort of how people should be thinking about using these tools a little bit differently, especially if they're using Bitcoin in small amounts. Yeah. And I think the other thing that's worth mentioning is obviously the

the exchange rate of Bitcoin has increased massively in just the last few weeks. And what that means though is if you're on a regular DCA schedule, maybe you're buying $50 a week or $100 a month or whatever small amount you might be DCA into Bitcoin with, the amount of Sats you're gonna get is gonna be lower and lower. And you eventually start getting into perhaps dangerous territory where if you're not managing those and say,

10 years or in five years, the value of that could be a lot more. Yet you've still got a set amount of sets and maybe the fee market's higher. And so there's a dynamic there where you do actually need to be quite vigilant for the long term. And this is not something again, that is maybe showing to a lot of users depending on the wallet or the system they're using. might just not, it might be hidden away. And so you've got this idea of constructing your cold storage of Bitcoin.

as if it's 10 times the price, also perhaps the fees are much higher as well. So kind of the mental model for how you would look at the stack that you've got in cold storage. I mean, I think the, it's a little bit difficult to, you know, to predict the future, both, I guess, in terms of price and in terms of fees. But I think over time, I pretty safely expect both to go up to some amount, right? What that eventually means though, is that, you know,

You mentioned sort of dollar-cost averaging into Bitcoin, maybe $100 at a time. I have an example in one of the articles where we talk about dollar-cost averaging $100 today. And this was written back when Bitcoin's press was even lower than it is now. It was getting you something like 67,000 sats. That's not very much in Bitcoin terms. It's cool that it's not very much. It's something to celebrate. But it also means that UTXO is quite small.

Cody Ellingham (23:46.222)
And the impact of fees in the future, remember they apply to every UTXO you have to spend. So if you've got, you know, a hundred of these UTXOs, you know, and they're all 67,000 sats or less, because the price is going up. Your fee rate, we talked about if it goes, if the fee rate were 200 sats per VBI, your effective fee rate to move those UTXOs would be 20%. So within range of where we've seen recently,

you know, for weeks at a time, we have a situation where those small UTXOs today that you're creating would become, you know, not unspendable, but painfully spendable, you know, in a fee rate environment we just recently saw. So that's sort of the idea we're trying to get across. And the other concept, I don't think we've mentioned this yet, is the idea of dust. So basically, this terminology used for anything that's below the fee rate.

That you have a UTXO that's worth less than what the fee rate would cost to spend that UTXO and thus there's no reason to spin it. It's effectively unspendable, right? Yeah. Yeah. So when we think about that 200 cents per V-Byte, in the ideal scenario, meaning the minimum transaction fee that you're going to get out of that is going to be 13,000 cents, right? So your dust rate essentially, like where it doesn't make any sense to spend that UTXO.

is 13,000 if you expect that you're going to be in a fee environment that's 200 sats per VBI at some stage, right? So, you know, it probably makes not very little sense to spend that UTXO well below that, but it makes zero economic sense to spend that UTXO at 200 sats per VBI if it's just 13,000 sats. So, yeah, you can think about it that way is, you know, they're ultimately unmovable if you want to keep any of the Bitcoin anyway.

Yeah, and that's not that far fetched because you mentioned before $100 today gets you what, 60,000 Sats, $100 New Zealand dollars. It's not that far fetched to think, well, what would $100 get you when Bitcoin is much higher than it is today? It could actually be getting pretty close to that dust limit for a single UTXO. And that might not be that far away, or it could be taking certainly quite a chunk out of it. In this example, it's 22%.

Cody Ellingham (26:14.926)
It could be getting quite a lot closer to that. And if you've got a number of those transactions that you're wanting to spend, that could be quite a costly enterprise. Maybe you want to combine 10 of them. That's going to be taking quite a chunk of That's the fear I have about not educating Bitcoin users around how they should be constructing these things is that someone who's diligently been stacking sats for five years,

finds themselves in a situation where they go to spend that one day. Maybe they have found their price where the Bitcoin they've been saving is going to improve their life. But then they found out that they have, in this case, 20 % less than they thought they did because they can't move it without spending that. That's a pretty devastating situation to find yourself in. So ultimately, think that's why we're aiming for what we're aiming for in terms of the Lightning Network and the things that are going to hang off of it is that

on a-

you know, we should be thinking about, you know, in our use of Bitcoin, again, your security should be treated as though it's the price is 10 times higher and your cold stores should be treated as though both the price and the fees are 10 times higher, right? So that going forward, you have a coherent strategy about how you're going to be able to use that Bitcoin in the future. Yeah. Well, maybe we can move on then to talking a little bit about what that management looks like, Brandon, and maybe some of the tools and some of the concepts people can use.

some of the rules of thumb that could be useful. I guess starting off with maybe think about people who are newer to Bitcoin or maybe haven't looked so much at the technical aspect. As I said at the beginning, things like running a full node, I mean, we both think that's very important, but it isn't strictly necessary to be able to access and use your Bitcoin. But in this case, the UTXO management in a future high fee environment is absolutely necessary and that is a responsibility of a UTXO holder.

Cody Ellingham (28:11.15)
How can they begin looking at this? What are some tools or systems they can use? What are some concepts they can look at for, I guess, assessing their situation? Are they in a bad spot with their UTXO state? Or are they in a good spot? How would you sort of approach that? Yeah, good question. I mean, I can sort of speak to how I do it. And I think that that's probably a good jumping off point. mean, most wallets, as long as they are

you know, reasonably featureful around Bitcoin specifically, should be able to demonstrate for you what your UTXO set looks like, right? So what that means ultimately is that instead of just showing you a Bitcoin balance, you can actually view the outputs of your previous transactions that create that balance, right? You can see each and every piece of Bitcoin that you own. That's the first thing is just like, be aware of that, right? Go take a look at it. Take a look at the list. I use Sparrow.

the most part, which is awesome with this stuff. It's not the first wallet I recommend to someone buying their first Bitcoin, unless I think they are reasonably capable of getting their head wrapped around it, but it is the one that I'd always recommend if you want to understand a little bit about how Bitcoin works, because the user interface at Sparrow just shows you how it works every step along the way, right?

And anyway, so you can look at that UTXO list and you can see, you know, where things are at. And sort of my rule of thumb is currently that I'm trying to keep my UTXOs what I expect that, you know, I might see in a spike over the next handful of years that I'm going to be fine in those situations, right? So I'm personally not creating, I'm using Lightning for most things on a day-to-day basis. And I'm creating UTXOs that are no less than a million Sats.

Right? And that's just a personal rule. haven't followed it 100 % of the time, but I do occasionally every, every couple of months or something, just take a look at the wallet, see what I've got in there. and if I have a handful of UTXOs that are smaller than that, then the first thing you can do is consolidation. And that's sort of the first tool or the first, thing you can try and get done to just consolidate those UTXOs. You see the fee rates relatively low, you know, these days, I feel like six is what we had, you know, when I last looked at it.

Cody Ellingham (30:39.094)
six sats per VBite. That feels relatively low to me. I might go take a look at my list of UTXOs if I have some that are 100,000 sats here or a couple hundred thousand sats here, I'll just make a transaction that spends to myself. That's what UTXO consolidation is. So essentially I act as though I'm just sending Bitcoin, but the address I put in is my own. To do this though, you need a wallet that lets you choose your UTXOs.

and Sparrow does a great job with that. Blue Wallet does a pretty good job with that on mobile. There's a whole bunch of others. again, most of the relatively featureful Bitcoin Wallets will let you do this well. Before you construct the transaction, you just choose the UTXAs you want to spend and then just spend those to that address that you're interested in spending it to. So that's the first thing. And then beyond that, like I said, my current saving strategy is

If I'm going to buy a smaller amount of Bitcoin, let's say less than a million cents, I'll land it in a Lightning wallet first. In my case, I have a Lightning node, but there's a lot of great Lightning wallet options. And if I'm actually receiving a smaller amount of Bitcoin, whether it's from a person or from Lightning Pay in this case, because I'm going to use my own thing, it's always to Lightning, unless it's a larger amount, right?

And that's the second tool is just use lightning as a buffer because from there it's very straightforward to create, you know, that once you've collected enough as much as you're comfortable leaving in the lightning while you're using just creating UTXO that's larger in size is the second thing you can do. It's just future proof from there. Yeah. And sure you're not creating UTXOs, too small. Yeah. Just a couple of things as well. I wanted to look back to change.

as well because something people need to keep in mind is if they're spending a small issue UTXO, say 50,000 Sats, but the actual amount they want to send is say 40,000 Sats, the way UTXOs work is it sends the whole thing and then the remainder gets sent back to you, right? And so you've got to be careful that you might actually have some of these smaller change UTXOs lying around. Maybe you could just speak a little bit about that, please. Yeah, that's a good point. Yeah, so the way you sort of

Cody Ellingham (33:01.838)
already hit on the main thread of it, but it actually can happen in any situation. So you could be spending a lot and end up with a small UTXO, right? Because usually wallets are pretty good at this. They're pretty good at, if you're not paying attention to which UTXOs you're spending, which you can do, but if you're not paying attention to it, usually they'll select one that's not going to leave you a small piece of change. But sometimes that's not an option. Sometimes the only option is to spend

You know, to spend, you know, if you're, but just to use round numbers, um, if you're spending, you know, two Bitcoin and all you have is, you know, a one and a three, it's got to use both. Right. Um, and so it's collecting, you know, the two UTXOs that make up the amounts and it has a lot of rules around that. So, you know, most wallets will go, am I going to create a dust UTXO? I don't want to do that. Um, you know, they'll, they'll

don't go through and make good choices, but sometimes you can end up with some change that's a small amount of Bitcoin. And you mentioned Sparrow wallet and I can also vouch for that. It's got a couple of things going for it. Number one, it's an open source project. So it's been checked by a lot of people as the code's fully open. You can confirm it for yourself or you can at least see what's going on under the hood. It's also, I mean, you can download the checksum and when you're getting the software from the website, you can

know, go through the process there to make sure it's actually the official release of Sparrow Wallet. there's some really good tutorials and Craig Rohr, who's the creator of Sparrow, is really quite clear and he's got some really quite user friendly info about just how to verify for yourself and these kinds of things. So in my opinion, it is actually relatively accessible, though it could be maybe a little bit daunting for someone who is like fresh brand new to Bitcoin.

I don't think it's challenging for, I don't think it's hard to use for a regular transaction or whatever it is. I just think that's what you said. There's a lot there because it's showing you everything. It's showing you how it works. And you're actually making precise choices in some cases about how you're spending Bitcoin or whatever the case may be. It can just be surprising, I guess, if you're unfamiliar with Bitcoin.

Cody Ellingham (35:27.946)
Yeah. And I think the other consideration again for people who are still learning sort of how the nuts and bolts of this work, but you could be in a situation where you have even a cold storage device, some sort of Bitcoin hardware wallet. And it's important to know that you can access that on Sparrow on your desktop computer without exposing your funds to any kind of risk. you wouldn't, you would never put your seed phrase into the computer. That's not something you want to do, but what you can do is you can bring your

X pub your public key over into the computer and then that allows you to see the transactions and allows you to create Transactions that you would then take over to your hardware device to sign So maybe if we just all live out there because maybe people will think you know I shouldn't put my seed phrase into the computer, which is correct You'd never want to do that, but you can still manage your UTXOs from your computer, right? Yeah, that's right. So

Whatever your wall construction is, you might have a seed phrase on a computer if you have a mobile wallet or something like that, but you want to consider how much Bitcoin you want to leave in that situation in a hot environment, hot meaning that it's on a computer, an internet connected device. But your key structure, to put a term on it, and what I mean is the structure of your Bitcoin wallet has many parts.

It has addresses, which we mentioned are the destination for a transaction that you own, right? It has what's called a public key. that public key represents the sort of, ultimately it's the thing that derives your addresses, but it ultimately represents the underlying structure from which all of your addresses and future addresses are derived. And that public key is something you want to keep.

relatively private with your public the reason being the public key is how all of your addresses are derived So if someone has that public key, they can see all of the Bitcoin you own that are associated with that public key, right? So not just one address, but all of the addresses you might have used They can see your entire transaction history, but that is something that is safe to keep on, you know safe from a you know, you're not gonna lose Bitcoin standpoint

Cody Ellingham (37:49.005)
to keep on an internet connected device that you can use on a daily basis and see transactions that you've received. And so that's how you can use these hot wallets on a laptop or a mobile device to essentially view balances even though that wallet software that you're using can't actually construct your transaction on its own. You can still see all the transactions. Where your private key is the thing that actually signs, you're keeping that safely tucked away on a non-internet connected device on a hardware well-to-setting.

So you have multiple parts there and the public key being part of the wallet software that you're using allows you to see everything in your transaction without actually being capable of spending it in that situation. Yeah. And so when it comes to then that management and that consolidation, so within Sparrow, if someone wants to download Sparrow and have a play with it, you'll see that you can actually select UTXOs from the UTXO tab and you can right click and there is a

I think there is a consolidate option that makes it very clear. You don't have to come up with that address. You don't have to think about that. You just can click consolidate and it will know to send it, basically send it back to yourself. And the analogy that you can think of is, you know, you've got all of these coins lying around and what that consolidation is going to do is it's going to melt them all down into one bigger coin. And that's the one you've got in a big sense. It makes turns all those UTXOs into one combined UTXO that's fresh. So it's sort of.

the model to maybe think about. It's an interesting thing about the way that Bitcoin works because people don't, you know, people don't really think about it that way. You're not, you're not actually sending, you know, you're not really sending anything. It's probably getting a little bit too nerdy, but, but essentially you're just, you're just taking your UTXOs and you're, you're signing them and saying, I'm going to do something with these UTXOs. These are going to disappear. And I'm going to create new UTXOs assigned to this address and this fee, right?

maybe these two addresses in this V. Those UTXOs you had cease to exist and the new ones are created because you've signed away your ownership, right? And Bitcoin doesn't particularly care whether you own the address that's in the output or not, right? So you can send it to yourself, you can send it to someone else. Oftentimes it's both. You're sending it to someone and there's a change address that's yours. So ultimately you're melting down the existing UTXOs that cease to exist.

Cody Ellingham (40:14.414)
and new ones are created that are owned by new addresses, you or someone else. Yeah. Yeah. And I think the other thing, if people have maybe tried or they've worked or used other cryptocurrencies, which have an address system per se, where you are actually sending things to an address, that is not, again, that's not how it works in Bitcoin. It is a UTXO model. And every transaction that is made is creating these UTXOs and

Again, you can see those if you use something like Sparrow wallet, you can actually, or Blue Wallet or any of these other great featureful wallets, you can see exactly what your UTXO set looks like. And you mentioned a million sets as your sort of a target or minimum for a UTXO. What are your thoughts? just if people are trying to structure their setup here, do you think there's value in having different sized?

UTXOs at different amounts. Do you think it's important to have like round numbers? Do you have any sort of general rules of thumb that you follow? Yeah, no, a, that's, that one's a, that one's a pretty deep rabbit hole. I don't have any, I have any strong opinions about, to be honest, you know, the, the UTXO management thing gets into some weird places where, you're trading off, you're trading off this, this concern that we've been talking about up to this point. But there's also some privacy considerations that

that get involved when you're talking about UTXO management, which means, you know, one thing is true, that I don't want to create a large UTXO, right? You know, if Michael Saylor is walking around with his Bitcoin wallet and there's one UTXO with, you know, 7,000 Bitcoin in it, that's a problem. And it's a problem because every transaction he makes has to use that gigantic UTXO.

And because Bitcoin is a public ledger, can see, you know, if you've received some Bitcoin from Michael Sellier, obviously you already know he's wealthy. But if you receive a similar transaction from someone you don't know, you can see that they have a significant amount of Bitcoin attached to that UTXO publicly available on the ledger. Right. So, you know, I don't have a hard and fast rule. mean, I guess that's because maybe I don't have enough Bitcoin. But the...

Cody Ellingham (42:37.73)
You know, I probably, you know, I'd probably be afraid to make one that was, I don't know, 20 million cents or something. Like, you know, I probably wouldn't go too huge. That's probably the only hard and fast rule that I would have though is just simply not to make them too large either from a privacy perspective. You know, the rest of it gets down into, yeah, the rest of it is all a privacy conversation.

You know, it can help if you're making UTX, you know, if you're using CoinJoin, you're going to end up with, you know, UTX O's that are all the same size and that's a benefit then. But beyond that, you know, I don't really concern myself too much with UTXO management other than I want them to be reasonably significant. You know, 1 million is a new rule. It used to be 500,000. You know, it's just sort of a, it's an evolving piece over time. You know, other than that,

Personally, don't give it the rest of the rules that you might have around that sort of thing a lot of thought. Okay. No, no, that's all good. And I think the other thing just as an adjacent to this coming back to the idea of UTXO management is also made briefly, we can talk about labeling and just what that means because certainly Sparrow and many of these wallets allow you to add a comment, private comment to just identify what a UTXO was, where it came from, these kinds of things. So maybe we can talk a little bit about that. Yeah, sure.

So labeling is valuable. And I think there's a handful of reasons why, even in a naive scenario where you don't have a lot of concern or a high threat model about your privacy, it is a public ledger, right? If you're buying a significant amount of Bitcoin and you're buying it from a KYC exchange and you deposit it directly on chain into your cold storage,

your identity is associated with that UTXO. And I think it's important to be aware of that. So I have a healthy habit because I've graduated into this place where on-chain Bitcoin is really only for savings for me. I don't use it on a day-to-day basis. I use my Lightning wallet almost every day. Hopefully I can make it every day one of these days. But I barely touch my on-chain wallet.

Cody Ellingham (45:05.774)
And so I'm likely to forget where where's these UTXOs came from And something like that is something I want to know Where did I get this from? I got it from someone who knows my name Is important because if they sent you that Bitcoin they know what the address is if you go to spend that Bitcoin later and you you know, you haven't labeled that or you haven't really concerned yourself with that and you

You know, want to spend an amount that's larger than that UTXO, you might mix it with another UTXO, right? That comes from another place. And now your name, you know, and that exchange is associated with both UTXOs. And you can find yourself in a situation where you really erode your privacy. know, Bitcoin is not a private network. It's a very public network, but it's a pseudo-anonymous network, right? It doesn't, it's not concerning itself with names and public faces. And you can lean into that.

You can just by labeling your UTXOs and knowing I got this from Coinbase and I don't want to spend it with, you know, I was stacking sats into a Lightning wallet and made a brand new UTXO from a Lightning wallet, which has a reasonable level of privacy associated with that process. Maybe I don't want to spend those two things together so that people don't know that these two things came from the same place. So labeling UTXOs is a habit I've gotten into.

And this works pretty well if you're trying to keep those to a manageable level. Hopefully you're not going to have hundreds and hundreds of them. You might if you're running a business that's using on-chain, but I think as we said, that's probably...

you know, unless you're selling cars or something, you know, that might be something that has to change going forward. So the idea basically is just be aware of those things and know that, you you might have some risk associated with certain UTXOs and just be aware of what you're spending. Yeah, excellent. And I think this does come back to what we started talking about at the beginning, that UTXO management is an essential part of being a responsible Bitcoin holder.

Cody Ellingham (47:17.8)
And again, it could seem a little bit overwhelming. Maybe people are new to Bitcoin or they've had this maybe strategy of just accumulating on an exchange, for example, and they haven't maybe thought about what it means to actually hold their own keys and hold their own Bitcoin. I don't think it's that much. I'm not particularly technical myself and I don't have any major issues managing my own UTXOs.

There's a lot of really good tutorials out there and especially using Sparrow Wallet, which we talked about before. There's a whole bunch of really great stuff on YouTube. Walks you through how to use it, how to understand what the different things are. And once you get used to it, it is actually quite empowering. It is a self-sovereign way of doing things. just keep, think keeping that in mind that maybe people have a bit of a journey to go through if they haven't thought about this stuff already.

And there's still time, know, there's no need to rush or make any rash decisions or anything like that. I don't think, even if there is a fee spike like we saw earlier in the year, you know, that passed after a couple of weeks and went back to normal. you know, never try and do anything too quickly. Don't try and rush or make any rash decisions, but just take your time to learn and educate, I guess. Yeah, I completely agree. I mean, I think the wrong time.

to really be concerning yourself with your setup, whether it's your security or whether it's your UTXO management when you're under pressure. That's the absolute wrong time to do it. The safest thing if you're under pressure is like do nothing, right? This applies to, you your security is one thing, but like this does apply to UTXO management. It applies to, you know, a Bitcoin hard fork, right? It applies to like, you know, there are situations where things in Bitcoin

might get crazy. And the price running up, whatever the case may be, things can get pretty wild. putting yourself under pressure to make changes is not exactly what I'd recommend. it's something that you should think about. And it sort of goes against human nature a little bit. When things calm down, that's when you should be considering what to do about it. But that's the truth. I don't think you should.

Cody Ellingham (49:39.446)
making these calls while you're under pressure. Yeah, absolutely. And I think just as a general commentary, know, price popping off, know, things, things, crazy things happening in the world. Take a deep breath, go for a walk, you know, take your time. Don't ever rush into anything. And again, if you're new to this, don't ever give anyone your seed phrase. Don't ever be tricked into any of that stuff. And you might even get an email about it. You might get someone calling you up, but just take a deep breath and think, is this what I really should be doing?

Because generally the best thing is to not do anything, wait, think about it clearly and make a strategy and have that low time preference. Completely agree. Coming back just quickly then, I wanted to close on this then back to the Lightning Network. So again, this is Lightning Pays Focus and you guys have really identified that this is really the future of payments and this layer two on Bitcoin that is maybe much more

or lower fees and much easier to use for everyday people potentially. The idea of the wallets and accumulating in a wallet and then moving that over to cold storage. So this is effectively the model that you guys are looking at. And this what I do as well. know, I DCA with Lightning Pay and you know, accumulates and can be pushed into a cold storage at a certain point. But I just wanted to mention that there is a couple of really good ways of doing this. You can use it, you could use a custodial wallet.

You could use your own, your own lightning node. But even something like Phoenix wallet, which I'm quite fond of. One of the benefits of that is if you do happen to receive even on chain Bitcoin into Phoenix wallet, it actually increases your, your liquidity. If I described that correctly. Yeah. And so you've got actually some benefits there where you can kind of consume these on chain UTXOs actually into your lightning wallet.

which increases how much you can spend back out if you need to. So there's a few little benefits there. But do you have any sort of just general commentary on like wallets that would be useful for Lightning, maybe things to consider if you are using a Lightning wallet? Yeah, absolutely. I mean, I think the important thing is to work with what you're comfortable with, right? I mean, when we're having this discussion about UTXO management, I talked about sort of my UTXO rule being

Cody Ellingham (52:01.614)
1 million cents, that's in comparison to my situation. My situation is I run my own Lightning node, right? And that's a different situation to most people are going to run into. So you might have a different rule set for what you're to do. But in general, we sort of break down these things into different categories. There's really easy to use wallets that are generally custodial. There's sort of intermediate wallets that give you a little bit more flexibility.

that are generally non-custodial and try to cover up for some of the hiccups around non-custodial lighting. And then there's super advanced stuff running your own node and different things that you can do, right? I mean, I think it's a completely valid strategy to use a custodial wallet these days, right now, as a way to hold some amount of Bitcoin that you're comfortable with. So first of all, what is a custodial wallet? Custodial wallet is a wallet that...

you have an account for, but we just got done talking about UTXOs and keys and everything else. The reality of a custodial wallet is you have none of those things. Someone else has the Bitcoin, you have an account and you have to trust that they're gonna give you that Bitcoin when you ask for it. Just like your bank, right? And in reality, like your privacy is just like your bank in those situations. Like there's a lot of things about those custodial wallets that are just like having a bank account, but for Bitcoin, right?

And that's sort of how you should think about those things. Now, the difference is that, you know, in some situations, your custodial wallet could disappear and you might not have much recourse, right? Like, you know, so consider who you're using and which wallet you're using and whether you trust that situation. But I think it's a totally valid strategy to use those things for amounts that are less than you want to make a UTXO for. So, know, stacking stats into a custodial wallet that you want to use on a spending

on a day-to-day spending basis. And when you get too much there, whatever you're uncomfortable with, whatever strategy you've set for yourself, sending that off to your cold storage is exactly what you should do. So I think that's a totally valid strategy. My preference is to use a non-custodial wallet, but as you graduate up the the scale of beginner, intermediate, advanced,

Cody Ellingham (54:22.828)
you're going, in today's day and age, you're going to run into some friction. So, Phoenix, I love too, but on a pretty regular basis, I'm walking people through some of the weird quirks about how their specific trade-off, about how they do self-custody lightning, the way that they try to smooth the edges around without getting too deep in the weeds about how lightning works. Like, if you're your own node, you do have to worry about

you know, where my channels are open to, whether I'm going to have a path to where I want to spend to, do I have inbound liquidity so I can receive like all these, you know, advanced terms? I think the journey of Lightning right now is trying to smooth out those, those edges, day-to-day users don't have to worry about that. And that's what Phoenix is trying to do. But it does mean there are still some rough edges, right? And you can mitigate those rough edges by knowing a little bit about how Phoenix wallet works in particular and how Lightning works generally.

But those do exist. So that is the second environment. So those sort of intermediate level wallets that sort of give you the capability of holding your own keys. But they're trying to smooth the edges of the Lightning experience for you. And then you can move all the way up to node level software. I use Zeus on my mobile device and it's connected to one of my nodes and it's great experience. But you have to know how to do that.

It's a different thing. I mean, that's kind of the landscape. But I think one of the things that I think about a lot is just like where all this goes, right? And what I have to think about is where all this goes in a situation where nothing changes on the layer of I have to think about it that way because, I mean, it doesn't seem like we're getting any changes anytime soon.

whether you like them or not. even when they do happen, the tooling that might come from those say covenant proposals or whatever, are many years away, right? And so we have to think about how Bitcoin evolves and how those tools evolve in the environment that we're in now. To be honest, to round this out and sort of stop rambling, I think the important thing is like,

Cody Ellingham (56:49.55)
if things move forward from here, what we're going to end up with is base layer Bitcoin. Lightning is going to serve a huge role. That huge role though will likely be the interconnecting layer between service providers like Lightning Pay, like Phoenix Wallet, like, you know, Wallis Toschi, whatever the case may be in different forms and functions. And I think the important thing across this whole landscape of options is to think about, you know,

Where do we want to sit from a big perspective in terms of how do we want the Bitcoin network to evolve? What do we want to present to our users, both in terms of UX and terms of sovereignty is a big thing for me.

And think it's going to be variable. It's going to be a lot of options. But I think that as we move forward, things like Chominy cache and both in terms of cashew and Fetty as they come in, you know, come of age are going to disrupt this picture we have about, you know, custodial lightning, self-custodial lightning running a node. It's going to be, it's going to start getting a bit murky and you're just going to be looking for the, for the companies that give you the best trade off for, for what you need.

But ultimately, if nothing changes on Bitcoin, that's where we're headed, is a service provider that creates a UX and a pair of privacy or sovereignty trade-offs that you like that's creating a user experience that you want to have. So that's a really long answer to what's available. But yeah, think there's a lot there. I think it's particularly enlightening.

it's useful to try things out. These are relatively cheap in most instances. So you can spin up a lightning wallet. You can poke around with it. If you don't like it, try something else. It's pretty good environment at the moment. Yeah. No, excellent. Thank you. And I think my sort of closing remarks would be, I certainly think Bitcoin, though it doesn't change that much over the years, there is certainly things you need to pay attention to if you want to carry your stack through time.

Cody Ellingham (59:03.956)
and things like UTXO management, upgrading your own education and understanding of the network and just kind of keeping an eye on it. And I think it doesn't have to be that onerous. Maybe it's watching a video or two every now and then and just kind of keeping your finger on the pulse, especially with some of these things we've talked about today. I think there is just a little bit there that maybe people need to consider. It isn't something that you can 100 % just fire and forget.

You do need to be somewhat aware. And one of the other ones that is quite popular is proof of keys day, which is January 3rd, I believe every year. Just double check that you have your seed phrase securely stored, that it's noted down somewhere. It's a nice way to maybe start the year just to double check that you actually do have your own keys and that they haven't been lost or compromised and things like that, which maybe people can just start considering that they have a somewhat of an active role in

and managing their Bitcoin and their self sovereignty. Yeah, that's great. I mean, I personally have my own my own key routine where I set up a self send some one of these consolidation transactions just to prove to myself that I can right? that's that's a good one. Yeah, I mean, I think just to add on, I think it's up to the it's also up to the

people providing these tools to sort of think about and start heading in the direction that we need to go. And things will happen naturally as we see different pressures and demands in the market. And I'm confident that we're going to have some really amazing solutions in terms of both in terms of day-to-day use. Bitcoin is a medium of exchange, but also savings will evolve too. I it wasn't that long ago where the normal Bitcoin wallet was

pretty much unusable, right? Like it wasn't completely unusable, but pretty much unusable from a comparison to where it is today. And that'll continue to change. So as we think about the different use cases for Bitcoin that people will find themselves wanting, which is today's savings, maybe tomorrow you've collected a significant amount of your net worth in Bitcoin and you want to start deploying that into the world, then you'll start thinking about spending.

Cody Ellingham (01:01:22.914)
you know, it's, up to, the people making products and services to, sort of, you know, make those things work and things are changing. Like I'm pretty excited about what we're going to see over the next year and what we have seen over the last. So, yeah, it's a good start and we're still going. And if people want to use lightning pay in New Zealand to stack sets, where can they go Brandon? man. they can go to lightning pay.nz is the, is the, is the main place. you know, we're,

We're trying to build a, you know, a New Zealand focused node on the Bitcoin network is the way that I like to put it sometimes. The thing we set out to do was connect Bitcoin to the Bitcoin, or connect New Zealand to the Bitcoin Lightning Network was our, the only phrase that we've had from the beginning that survives. Ultimately though, the key thing that we're doing is building services for New Zealand first that work here. That

We didn't really have. We didn't have a Bitcoin focused company that was focused on how people save in Bitcoin and not necessarily how they get access to gambling tokens in the casino. So four people that want to save in Bitcoin, four people that want to hopefully spend that value in the future. Yeah, looking forward to it. yeah, it's just lightning paid. That's it. Yeah, cool. All right. Thank you very much, Brandon. All right. Thanks, Cody.

Thank you for listening, I am Cody Ellingham and that was the Transformation of Value. If you would like to support this show, please consider making a donation either through my website or by directly tipping to the show's bitcoin wallet, or just pass this episode on to a friend who you think may enjoy it. And you can always email me at hello at thetransformationofvalue.com

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