“Transactions fees are high. Did you manage your UTXOs appropriately while fees were low?”
— Jameson Lopp, Casa co-founder and CTO
Ordinal inscriptions are clogging the network and driving Bitcoin transaction fees through the roof.
High fees make transactions unaffordable and although Lightning can help avoid some of those fees, that will only work if you have your Lightning channels already setup and with sufficient liquidity.
Buying Bitcoin
While fees were low, it was ok to buy $20 worth of Bitcoin at Swan or Strike and then send it to your wallet but that is not a good option anymore.
Just like it’s not a good option anymore to send $20 worth of Bitcoin from Fold or whatever Bitcoin rewards program you use to your Bitcoin wallet.
Let’s consider a transaction with 1 input (one of your UTXOs) and 2 outputs (payment to the recipient and change coming back to you). This transaction will have a size of 226 vbytes according to this calculator. With transaction fees as high as 700 sats/vbyte this means a transaction fee of 158,200 sats.
If you send 1,000,000 sats from your custodial wallet to your own wallet, you will create a new UTXO in your wallet with 1,000,000 sats and when you try to spend it you will be able to make a payment of up to 841,800 sats with a fee of 158,200 sats: a whopping 18.8% transaction fee. 😱
You will need to balance the risk of having a large amount of sats in a custodial wallet with the the fee you’re willing to pay to decide when to withdraw.
With the current transaction fees, UTXOs will incur the following fees when you try to spend them to the max after deducting the sats for fees:
- 1,000,000 sats: 18.8%
- 2,000,000 sats: 8.6%
- 5,000,000 sats: 3.3%
Non-custodial Lightning wallets
Non-custodial Lightning wallets are great from a sovereignty perspective. You hold your Bitcoin and no one can rug you.
But there is no such thing as a free lunch. The increased sovereignty comes with the burden of Lightning channel management.
I recklessly transferred small amounts of Bitcoin to my Mutiny wallet to pay the weekly allowance to my kids and now the wallet has 10 Lightning channels, each with limited liquidity and effectively useless.
To avoid making the same mistake as I did, create Lightning channels with at least 5 million sats. Otherwise you will end up a Lightning channel that is holding a majority of your Bitcoin as unspendable Bitcoin on reserve for when the channel is closed.
Swapping from Bitcoin to Lightning is a double whammy:
- You spend a large amount of Bitcoin in the transaction that creates the new Lightning channel
- A large amount of the Bitcoin that makes it to the channel is held as reserve for when the channel closes
Here is what Mutiny is suggesting if I try to swap 200,000 sats from Bitcoin to Lightning within the wallet. This transaction would likely end up with somewhere around 100,000 sats of spendable Bitcoin for the cost of 261,774 sats.
Summary
Create UTXOs that are large enough to justify the transaction fees that you will incur when you spend them.
Create Lightning channels that have big enough liquidity so that the Bitcoin held in reserve becomes a very small factor.
Notable notes
Recommendations
Jameson Lopp
I don’t always agree with Jameson but I always learn something new from him.
You can follow him here).
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This newsletter is for educational purposes. It does not represent financial advice. Do your own research before buying Bitcoin.