About Coin Selection

Reminder on UTxO

Cardano is a crypto-currency that is UTxO-based. UTxO stands here for “Unspent Transaction Output”. In essence, UTxOs are very similar to bank notes and we treat them as such. Hence, it is not possible to spend a single UTxO in more than one transaction, and, in our current implementation, it’s not possible to split a single UTxO into multiple recipients of a transaction. Note that, we also use the term coin when referring to UTxO.

Contrary to a classic accounting model, there’s no such thing as spending part of a UTXO, and one has to wait for a transaction to be included in a block before spending the remaining change. Similarly, one can’t spend a $20 bill at two different shops at the same time, even if it is enough to cover both purchases — one has to wait for change from the first transaction before making the second one. Having many available coins allow for greater concurrency capacity. The more coins are available, the more transactions can be made at the same time.

What is Coin Selection

For every transaction, the wallet backend performs a coin selection. There are many approaches to the problem and, many solutions. Moreover, there are a few problematics we have to deal with when performing coin selection:

  • A transaction has a limited size defined by the protocol. Adding inputs or outputs to a transaction increases its size. Therefore, there’s a practical maximum number of coins that can be selected.

  • As soon as coins from a given address are spent, that address is exposed to the public. From this follows privacy and security issues known about address re-use.

  • In order to maintain good privacy, change outputs shouldn’t be much discernible from the actual outputs.

  • Because of the first point, a wallet needs to make sure it doesn’t needlessly fragment available UTxOs by creating many small change outputs. Otherwise, in the long run, the wallet becomes unusable.

  • Coin selection needs to remain fairly efficient to minimize fees as much as possible.

In Cardano, the coin selection works mainly in two steps:

  1. Coins are selected randomly to cover a given amount, generating a change output that is nearly as big as the original output

  2. The inputs and outputs are slightly adjusted to cover for fees

Note that in case the random coin selection fails (because we couldn’t reach the target amount without exceeding the transaction max size), we fallback to selecting UTxO from the largest first. If this fails again, it means that the UTxOs of the wallet is too fragmented and smaller transactions have to be sent. In practice, this shouldn’t happen much as the wallet tries to get rid of the dust (by selecting randomly, if one has many small UTxOs, a random selection has bigger chances to contain many small UTxOs as well).

Multi-Output Transactions

Cardano only allows a given UTXO to cover at most one single transaction output. As a result, when the number of transaction outputs is greater than the number of available UTXOs, the API returns a ‘UTXONotEnoughFragmented’ error.

To make sure the source account has a sufficient level of UTXO fragmentation (i.e. number of UTXOs), the state of the UTXOs can be monitored as described in Getting UTXO Statistics. The number of wallet UTXOs should be no less than the transaction outputs, and the sum of all UTXOs should be enough to cover the total transaction amount, including fees.