Bitcoin has irritating kinks, with dust being among them. In some cases, the Bitcoin protocol generates small output coins as the users send and receive tokens. These small outputs are known as Bitcoin dust. Some of these coins are so tiny in value, and spending them requires more fees than their worth.
However, blockchain has little room. Therefore, transactions of small value take up significant space like large transactions. Thus, a lot of tinier coins can cause performance issues in the entire system. That’s something that Bitcoin users know (at least advanced users) and that requires some attention from the community.
Initially, Bitcoin dust was not necessarily a problem for crypto users. However, things changed when the fees increased, making transacting with smaller values more expensive. Consequently, some developers urge Bitcoin users to get rid of dust once the costs of transactions get reduced.
Bitcoin Dust Explained
As hinted, Bitcoin dust is a tiny amount of this cryptocurrency’s leftover. It’s a small amount of unspent Bitcoin in a transaction whose value is lower than the minimum amount that a user can transact (due to the fees that apply to a transaction). Essentially, processing Bitcoin dust is impossible. Therefore, the Bitcoin address or wallet traps this small amount of the cryptocurrency because its monetary value is lower than the fee for processing or spending it.
Miners must validate the transaction for authenticity and include it in the blockchain network whenever someone transacts with Bitcoin. Miners earn some tokens for validating the transactions. The blockchain has a working mechanism that determines the payment a miner receives for validating a transaction. In some cases, the mining fee is higher than the transaction amount. Thus, Bitcoin dust is the transaction amount with a higher cost than the actual amount, rendering it impossible to complete.
A Bitcoin Dust example would be anything below 1,000 satoshis at the time of writing. However, this could become even lower in the future if the price of Bitcoin continues to move higher. Now, if the Bitcoin price falls, then a 1,000 satoshi transfer might not be enough to pay network fees. This is something that you should consider every time you spend a small amount of BTC.
For example, a Bitcoin transaction of 0.000008 would be considered to be Bitcoin dust. It is not enough to pay for the network fees and it would require you to consolidate this amount with a larger transaction before being able to process it. Furthermore, you should also know that each wallet that you use might have some BTC leftover that would be considered dust. For example, you might see some cents being stored in your BTC wallet and you would not be able to move them unless you process a transaction with a larger amount of funds.
What is Cryptocurrency Dust Limit?
The world has many cryptocurrencies today. Most virtual currencies are decentralized, with some countries making and issuing new tokens. For instance, China made a Digital Yuan that the National Bank of China regulates. People can acquire, trade, and invest in this virtual currency through the Yuan Pay Group. Perhaps, you can learn about it here yuan-pay-group.net
But all cryptocurrencies have some dust, and users don’t lose it. However, the dust is impossible to spend and, therefore, unusable. The transaction fee for every cryptocurrency varies depending on the network and the market. Thus, the dust limit changes depending on the token’s price and the network’s popularity. Also, the cryptocurrency you use determines the dust limit because the fees vary. But most wallets use the Bitcoin dust limit as their benchmark.
We can consider that the Bitcoin dust limit is currently the fees that you have to pay to process a transaction. However, what would be the sense of sending a transaction and paying 99% of the value in fees? That would have no economic sense. Usually, fees should remain a low percentage of the whole Bitcoin transaction. Therefore, it is always a good thing to wait until you get the necessary funds before sending a transaction that can be very small.
Is Bitcoin Dust Bad?
Bitcoin dust is not necessarily harmful. It’s a byproduct of a blockchain-based digital payment network. Users see the dust when transacting and trading. For instance, if you trade ether for Bitcoin, the crypto exchange won’t convert the entire amount for the other in eight decimal places. Usually, you will have a small leftover because there’s no rounding.
The primary disadvantage of Bitcoin dust is the de-anonymization risk. And this happens when hackers can link the user’s identity to a transaction. Hackers have a strategy known as a dust attack. With this strategy, they can send micro Bitcoin dust amounts to an unsuspecting user. Upon spending the dust-tainted, a hacker can analyze the other transactions of the users using software and develop their profile. Eventually, they can use the profile maliciously. We will get into the details of de-anonymization later in the article and why you should care about it.
In most cases, people receive Bitcoin dust even without doing anything. And this is known as a dusting or dusting attack. The purpose of this attack is to track Bitcoin payments and link them to individuals or businesses. But dusting is not always malicious. Some people use them to advertise in the crypto space or send messages.
Thus, Bitcoin users should not always worry about dusting. Nevertheless, cryptocurrency holders should know the small amounts in their wallets and their accumulation process. Understanding how Bitcoin dust works is an important thing that every Bitcoiner should know and consider. Failing to do so could bring some risks to users and BTC holders.
Understanding UTXOs and Fees
Understanding UTXOs and how they affect the Bitcoin network is a key thing to having a better understanding of what Bitcoin dust is. When we talk about Bitcoin transactions, we usually refer to a single transaction of an “X” amount of BTC. However, we do not take into consideration the Unspent Transaction Outputs (UTXOs) that have been involved in processing specific transactions.
As we explained in our “What are Bitcoin UTXOs” guide, a UTXO can be any amount of BTC larger than 1 satoshi. Each Bitcoin transaction consists of different UTXOs that are consolidated into one single transaction. You can think of UTXOs as different banknotes.
For example, you can receive three Bitcoin transactions: 1 BTC, 0.5 BTC and 0.25 BTC. You will now have 1.75 BTC that came from three different UTXOs. Now, if you want to buy something that costs 1.4 BTC, then you will be forced to use two of the previous UTXOs to process the transaction. You will take 1 BTC and 0.4 BTC from the 0.5 BTC transfer received.
The larger the number of UTXOs, the more expensive a transaction would be. Bitcoin fees are calculated depending on the bytes of each transaction. The larger the number of UTXOs, the larger the bytes of a specific transaction and the larger the fees that you will have to pay to miners to process the transfer.
Due to this reason, it becomes expensive to consolidate Bitcoin dust that is left in some wallets. You could have 0.000008 BTC in a wallet, which is less than $0.25 at the time of writing. Moreover, Bitcoin transactions are paying a fee that is close to $0.60. Therefore, unless you add more BTC to your wallet, you would not be able to process this transaction.
Creating small UTXOs creates a problem for the blockchain. Indeed, according to data shared by Satoshi Info, the number of Unspent Transaction Outputs has skyrocketed in recent years, and there are no signals that point to a reduction of these UTXOs. This would definitely have an impact on Bitcoin dust and how we manage our funds.
Consolidating Bitcoin Dust
One of the ways to get rid of Bitcoin dust is by consolidating transactions. Coming back to our previous example, this would be equal to converting the previous three UTXO into just one UTXO. That means that rather than having three transactions (1 BTC + 0.5 BTC + 0.25 BTC), we would directly have 1.75 BTC.
When it comes to Bitcoin dust, that would mean that even small transactions such as 0.000008 BTC would then be summed up as the main transaction. In the previous case, that would mean we would now have 1.750008 BTC (supposing the fees have been already paid using additional funds).
This new 1.750008 BTC amount that we have in our wallet, would be considered by the network as just one UTXO, and therefore, it would cost less to be transacted in the future if we would have three or four UTXOs.
But how to consolidate Bitcoin dust? If you want to process a transaction, you can use the small amount of BTC and add it to the final amount you want to transact. You can do so with Coin Control through your cryptocurrency and Bitcoin wallet.
Another thing that you can do is to send all the UTXOs that you received to another wallet that you control. In this way, all the UTXOs will be consolidated into just one large UTXO. This is equal to going with a bag of pennies and exchanging them for a larger banknote.
Make sure that you don’t consolidate UTXOs that you don’t want to add to your final balance. This is especially important if you received transactions from unknown users or you were targeted by a Bitcoin dust attack.
What is a Bitcoin Dust Attack?
There is an important term linked to Bitcoin Dust, which is called Bitcoin Dust attack (sometimes called Bitcoin dusting attack). If you are wondering what this is and how it affects you, let’s get into the details of how the blockchain works.
A Bitcoin dust attack is a method used by attackers and hackers to get information about cryptocurrency users on the blockchain. This attack consists in sending small amounts of BTC to different wallets (dust).
As we mentioned before, due to these dust attacks, it is possible to deanonymize UTXOs. Attackers can connect different UTXOs to the same wallet, and therefore, guess which is your identity by linking all these transactions (which of these UTXOs belong to the same wallet).
This happens because you would consolidate your funds and link different wallets and UTXOs into a new UTXO. It is very important to pay attention to Bitcoin dust when received from another party. You should always make sure to flag this transaction in your wallet and avoid using these funds through coin control.
It is worth pointing out that dust attacks can happen on other blockchain networks as well. For example, several users reported on Reddit that they were receiving XRP dust attacks. XRP is the virtual currency used on the Ripple network. This is more common in blockchain networks that have lower fees and where attackers would not be required to pay large amounts of funds to process a large number of transactions.
The same can happen with other blockchain networks. Hence, it is always important to check for strange dust transactions that “magically” appeared on our wallets, no matter the blockchain network we use.
How to Defend Yourself from a Bitcoin Dust Attack?
This is a very interesting question that is worth taking into consideration. There are some ways in which you could defend yourself from a Bitcoin Dust attack, making it possible for you as a user to avoid being deanonymized.
Converting Your Coins in a Cryptocurrency Exchange
If you received Bitcoin dust and you hold your cryptocurrencies on a cryptocurrency exchange, then you should not be worried. Usually, exchanges would let you convert your Bitcoin dust to another digital asset and get rid of small amounts of virtual currencies. Indeed, most cryptocurrencies in the market are subject to dust due to different reasons.
Cryptocurrency exchanges have also been focusing on consolidating funds over time. This is one of the most important things for them. Indeed, we many times see that transaction fee suddenly spike when analyzing blockchain data. These are usually exchanges trying to consolidate funds and pay higher fees to avoid overpaying in the future if the blockchain network becomes larger (and block space scarcer).
Using Coin Control in Cryptocurrency Wallets
Another way to defend yourself from a Bitcoin dust attack is by using coin control in cryptocurrency wallets. This is an advanced function that you can use in different wallets to send Bitcoin and digital assets without including the UTXOs that you don’t want to consolidate. This would help you avoid the Bitcoin dust attack problem and continue to remain anonymous while using Bitcoin, which is something that we all want.
It is always a good thing to consolidate coins. However, when you are targeted by a Bitcoin dust attack, you should make sure that you don’t use the funds that the attacker sent. This would allow them to track you and link your identity with specific IPs, names and future transactions. Understanding the risks of a Bitcoin dust attack is definitely important and it would help you avoid being anonymized.
Make sure that the wallet that you use offers this feature and makes it easier for you to handle your funds. This is an advanced feature and option that might not be available in some wallets. You can always talk to customer support and verify with them.
Bitcoin Dust Problem in the Future
We also know that there are some problems in the coming years for all of those that believe in Bitcoin and cryptocurrencies. One of the things that investors should pay close attention to is the fact that, in the future, blockchain space would be even more limited than now. That means that processing the same transaction in the future is expected to get more expensive compared to now.
This happens for two simple reasons. The first one is that block space is limited. Unless the Bitcoin community changes the protocol and decides to increase the block size in one or another way, it would be difficult for the Bitcoin blockchain network to apply lower fees to process transactions.
The second thing to take into account is related to the fact that there is expected a larger demand for block space. There would not only be a limited amount of space to process transactions on the Bitcoin network but there is also going to be a larger demand for that space.
This would only create a situation in which fees would be higher and miners would rely less on block rewards and more on fees paid by users. Indeed, users that want to enjoy low-fee transactions and move dust from one wallet to another should start thinking about the Lightning Network (LN), a second-layer scaling solution for Bitcoin that focuses on smaller transactions.
While the Bitcoin network will work as the main layer to process large and secure transactions, the Lightning Network will be used for those users that need to process smaller transactions over time (and don’t want to pay high fees).
Lightning Network: No More Bitcoin Dust
Thanks to the Lightning Network it would be possible for you to stop thinking about Bitcoin dust. This is possible thanks to the fact that the LN lets you process transactions that can be as low as 10 satoshis and where you might pay just 1 or 2 satoshis as a fee. This is possible thanks to Lightning Network nodes that process transactions and keep the network efficient.
This would not be a problem for you as you will not have to be worried about any Bitcoin leftover in your wallet. Indeed, 10,000 satoshis today might be worth more than $5 in the future, and used to purchase goods and services, and you don’t want to miss that option. Therefore, the Lightning Network does not only reduce congestion on the main Bitcoin network, but it also makes it easier and faster for people to handle BTC payments and Bitcoin dust.
The term Bitcoin dust might become a thing of the past as the Lightning Network continues to expand and attract new users. As the network grows and the value of each BTC transaction becomes larger, satoshis could become the standard. If that’s the case, then there would be no need to talk about Bitcoin dust again as a threat or as something without value that only creates problems for Bitcoin holders.
Right now, there are some wallets and exchanges that are letting users manage their funds using the Lightning Network. However, the services linked to the LN could become even more in the future. Hence, there are only positive things ahead when it comes to Bitcoin, the lightning network and Bitcoin dust.