Imagine you're buying a coffee that costs 1.50 dollars, but all you have is a 20 dollar note. After the transaction, you receive 18.50 dollars in change. These coins and bills are your "unspent dollars," which you can use for future purchases. This scenario is a simple everyday example of how we manage and think about change or residual money after making a purchase.

The concept of "unspent euros" translates directly into the world of Bitcoin through what's known as Unspent Transaction Outputs, or UTXOs. These are the pieces of digital currency that remain after you make a Bitcoin transaction. For instance, if you have 1 BTC and spend 0.1 BTC, the remaining 0.9 BTC becomes your UTXO, ready to be used in future transactions. Just like your euros, these UTXOs represent the balance that hasn't yet been spent.

Think of receiving lots of small coins as change multiple times. Over time, you might end up with a drawer full of coins, similar to Scrooge McDuck’s vault. In the digital world of Bitcoin, holding many small UTXOs can be analogous to having many small coins. While each UTXO represents potential spending power, managing many small UTXOs can become cumbersome and expensive, particularly when transaction fees are high.

Consolidating UTXOs means combining several small UTXOs into a single one. This process is akin to exchanging a pile of small coins for a few larger bills, making future transactions simpler and potentially cheaper. This is especially valuable in Bitcoin, where transaction fees depend on the size of the data sent through the network.

If you neglect to consolidate your UTXOs, you might find yourself in a situation where the transaction fees required to spend those UTXOs could exceed the value of the UTXOs themselves, especially during periods of high network demand. For example, a UTXO worth €10 might cost €2.5 (or 25%) in fees now, but if fees increase, that cost could make smaller UTXOs uneconomical to spend.

The easiest way to consolidate your UTXOs is to send all of your Bitcoin to yourself. This can be done in wallets like Xverse. To do it, copy your Bitcoin wallet address, click "send" to send Bitcoin, paste your address, set the maximum amount you can send, execute the transaction. Now once this transaction completes, all of your UTXOs should be consolidated into one large UTXO.

Consolidation should be approached carefully, particularly because not all Bitcoin wallets support manual UTXO management. For those that do, such as Sparrow Wallet, the process involves selecting UTXOs within the wallet, generating a new receiving address, and sending all selected UTXOs to that new address in a single transaction. This not only tidies up your digital wallet but also optimizes future transaction fees.
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The steps to follow are as follows:

As Liquidium utilizes PSBTs and DLCs natively, loan initiation transactions as well as repaying transactions and escrow-unlocking transactions are facilitated on Bitcoin L1. Having fewer UTXOs will make transactions cheaper in general. Especially during high-fee environments, this can be of help.

At Liquidium, we take great care to ensure the security and efficiency of our platform. One way we do this is by only using clean UTXOs in our transactions.
Here are UTXOs that are excluded:

By excluding these types of UTXOs, we can ensure the safety and efficiency of our transactions. Accidentally spending or burning runes or inscriptions can result in loss of funds, and dust UTXOs can cause issues with fees and network speed. By only using clean UTXOs, we can avoid these potential problems and provide a better experience for our users.