Mike on Nostr: It takes all your small balances and merges them into one large balance. Think of it ...
It takes all your small balances and merges them into one large balance.
Think of it like taking a bunch of loose change to the bank to exchange it for a large denomination note.
You want to do this because fees are based on each balance (UTXO - Unspent Transaction Output) so if you send 100K Sats and you have 10 10K Sat UTXO's then you will be charged 10 X on the fees compared with a single UTXO of 100K sats.
You also don't want to consolidate too much because if you want to spend say100K Sats and you only have a 10 BTC UTXO, everybody will see you have 10 BTC as soon as you spend 100K Sats.
i.e. you will send 10 BTC, the recipient will receive their100K Sats, the miner will take say1K Sats in fees and you will receive a single UTXO of 9.99xx BTC in change.
Think of it like taking a bunch of loose change to the bank to exchange it for a large denomination note.
You want to do this because fees are based on each balance (UTXO - Unspent Transaction Output) so if you send 100K Sats and you have 10 10K Sat UTXO's then you will be charged 10 X on the fees compared with a single UTXO of 100K sats.
You also don't want to consolidate too much because if you want to spend say100K Sats and you only have a 10 BTC UTXO, everybody will see you have 10 BTC as soon as you spend 100K Sats.
i.e. you will send 10 BTC, the recipient will receive their100K Sats, the miner will take say1K Sats in fees and you will receive a single UTXO of 9.99xx BTC in change.