Using Lightning to save on Fees
Efficiently stacking sats to cold storage
Written by Simon - Lightning Pay Team
Updated May 21, 2024
Bitcoin is a great place to store your wealth. It’s ideal for saving, and as we know you can send bitcoin around the world for very low fees, especially on the Lightning Network. But there is a hidden cost that can sneak up on you – particularly more recently when the base layer has become very congested at times, and therefore expensive to transact on. That cost is having a lot of small Unspent Transaction Outputs (UTXOs) in your on-chain wallet.
Understanding UTXOs: The Building Blocks of Bitcoin Transactions
Every bitcoin transaction involves UTXOs, which are basically the pieces of bitcoin you receive and hold in your wallet until you decide to spend them. Think of UTXOs as individual bills in your physical wallet. Each UTXO represents a certain amount of bitcoin that you can spend. However, managing these UTXOs can be costly. When you send bitcoin, the more UTXOs you use in your transaction, the higher the transaction fees when you move your bitcoin. You might have a total bitcoin balance shown in your wallet, but every deposit you’ve made is another UTXO which adds to the fee when you go to spend or send it. Imagine you’re at the supermarket counter and your total is $100 but you’ve bought a wallet full of twenty and fifty cent coins. It takes you longer to count out your money than someone with a single $100 note. That’s the downside of having a large number of small UTXOs.
The Role of Lightning Wallets in UTXO Management
Using a Lightning Wallet offers a handy solution to the costly UTXO problem. By using a Lightning Wallet, you can consolidate your bitcoin transactions in advance of moving them to cold storage. Because the Lightning Network is a layer on top of the bitcoin blockchain it doesn’t create a UTXO every time you transact. It only creates one when you send your balance to the main network. This is a bit like exchanging your smaller coins for larger notes before depositing them in a bank, reducing the number of transactions (and fees) when it’s time to move your bitcoin to more secure storage.
When to Move Bitcoin to Cold Storage
While a Lightning Wallet is excellent for handling regular, small transactions, it’s not the most secure place to store large amounts of bitcoin for the long term. This is where cold storage comes in. Cold storage refers to keeping bitcoin offline, where it is safe from online threats such as hackers. Once you've accumulated a significant amount of bitcoin in your Lightning Wallet, transferring it to cold storage ensures greater security. By waiting until you have a reasonable amount to move, you can also minimise the number of costly UTXO transactions involved. How much you’re comfortable with keeping in your lightning wallet is up to you. But if you’re unsure a good rule of thumb is to aim to keep your average fees to less than 1% of the transaction size. So, with fees on bitcoin averaging 50 sats per vByte you should be aiming for about 1 million satoshis, or 0.01 BTC to send your cold storage wallet.
The Bottom Line for UTXO Management
For Bitcoin beginners, understanding how to effectively manage your stack can save you money and enhance security. Stacking your bitcoin in a Lightning Wallet allows for efficient handling of small, frequent transactions by reducing UTXO costs. When the time is right, moving your accumulated bitcoin to cold storage provides the security needed for larger amounts. This strategic approach not only optimises transaction fees but also security, making it an essential technique for anyone looking to manage their bitcoin stack.