Businesses such as Coinbase had been creating a lot of dust and were inefficient in their usage of block space because they didn’t sufficiently batch customer transactions. Due to the popularity of major exchanges such as Coinbase during the rally of 2017, this behavior affected the rest of the Bitcoin network, and many rightly complained.

When fee markets pulled back in early 2018, Coinbase had both the incentive and the ability to reduce their existing dust footprint and their future production of dust. Batching transactions saves high-volume businesses such as Coinbase fees but also reduces their dust production. Antoine Le Calvez’s excellent When the Bitcoin dust settles analyzes this “UTXO consolidation” period, a spring cleaning of the UTXO set.

Do other constituencies in the Bitcoin ecosystem have the same combination of incentive and ability to reduce dust?

Users

Users are not directly affected by dust. They may create dust in aggregate due to inefficient wallet software they use, but few individual Bitcoin users have created much dust.

Users don’t like high fees, but dust doesn’t directly affected the fee market. Inefficient UTXO management which creates dust but also results in more, small transactions is a bigger cause of increasing fees. Users therefore only have a modest incentive to encourage dust reduction.

Even if they lack the incentive, do users have the ability to limit dust? After all, users have a lot of power in cryptocurrencies, as the UASF movement of 2017 proved. But dust is a shared problem, a tragedy of the commons, and so requires some coordinated solution. Users will need help from developers and/or exchanges and miners to clear any dust they own.

Individual users may be willing to “donate” their dust, and Bitcoin does provide mechanisms (e.g. ALL|ANYONECANPAY or NONE|ANYONECANPAY type signatures) for users to donate their dust. If wallets supported it, a socially-coordinated, public spring cleaning could be an interesting way to crowd-source funds for various user-chosen charities or projects benefiting the Bitcoin ecosystem.

Miners

Most miners ignore dust.

Miners in pools are just paid to hash; pool operators need to manage the UTXO set and deal with any bloat it contains, but they are also free to simply drop low value-density, dusty UTXOs from their mempools. No users are likely to spend them anyway! This would create an opportunity for scavenger-pools to pick up and attempt to mine these dust UTXOs, but this still requires users to act to spend them. Users may not notice or care.

Standalone miners or pool operators who do care about dust may choose to schedule a fee holiday — a time period where these miners will purposely allow zero-fee transactions which spend (only) low-value-density UTXOs, perhaps done during a spring cleaning. This will allow users to clean up their wallets while helping miners and node-operators to decrease the memory footprint of their UTXO set by a significant amount.

It’s possible that proposals such as BetterHash, which distribute the ability to choose transactions, might encourage more individual miners to leave traditional mining pools (where the pool operators determine the blocks to be mined) and to construct their own blocks. They might, then, have to deal with/care more about dust.

Miners could theoretically also refuse to mine transactions which create dusty UTXOs. But would they really be willing to sacrifice fee income in the short-term to prevent creating dust in the long-term? Given that pools dominate mining and that these pools don’t particularly care about dust, it seems unlikely.

Full-Node Operators

Full-node operators — those who backup the blockchain, relay, and verify transactions but don’t mine — also have some power over dust creation. The minRelayTxFee parameter in the bitcoind software allows node operators to set a minimum value density below which they will ignore/drop UTXOs (and the transactions creating them). To an extent, this setting already prevents the creation of extremely low-value density UTXOs — there would probably be more dust today if this setting had never been implemented.

But few node operators tune their configuration settings to this level of detail. Developers, because they choose the default settings that come with the bitcoind software, may have a lot more influence over how full nodes will operate in the wild.

Developers

In many ways, developers have the most power to limit dust production.

Developers write and document wallet software. Their trade-offs (and failures) in the face of a difficult optimization problem are the root cause of dust. New strategies and best practices, as they spread from wallet to wallet, driven by the demands of users, are the best way to decrease future dust production.

Developers define default node settings, which percolate through the network of full-node operators, miners, exchanges, and other businesses. This provides a sort of herd immunity against dust, filtering out dusty transactions from malicious or inefficient wallets.

Through grassroots campaigns (just like the UASF) developers can work directly with users and miners to build the social software necessary to schedule and operate spring cleanings and fee holidays.

By building second layers such as the Lightning Network, developers can even hope to transcend the problem of dust altogether.

Dust is Inevitable

But no constituency or collaboration can hope to eliminate dust production altogether. Despite the increasing awareness of dust during 2017 and the attempts to clean it in March 2018, dust keeps being produced:

UTXOs with value-density <50 Satoshi/byte display a sawtooth curve of constant production followed by quick pullbacks: someone is actively making dust — but at least they’re cleaning up after themselves.

There’s also already 10% more UTXOs (in dollar terms) with value-density <100 Satoshi/byte — these UTXOs aren’t dust today, but will turn to dust rapidly if the fee market rises again as it did in 2017.

Dust production is an inherent inefficiency of Bitcoin.

Does Dust Only Affect Bitcoin?

Not all blockchains use a UTXO model for transactions. Ethereum, for example, uses an account model.

ETH deposited into an address from different transactions is commingled.

Transaction fees are paid by the address broadcasting the transaction, not the address from which ETH is being transferred.

Both of these differences greatly reduce dust production but they don’t eliminate it. Ethereum developers also worry about dust and the bloating it causes in the Ethereum blockchain.

The production of dust, defined more generically as tokens which are uneconomical to spend, seems to be a common inefficiency across blockchains.

Thermodynamics of Blockchains?

The difference between a dusty or a normal UTXO is one of utility. A Satoshi held in a dusty UTXO is less useful than the same Satoshi held in a normal UTXO. But they’re otherwise identical on the blockchain.

The hashpower wagered by miners to secure the blockchain protects dusty UTXOs just as much as it protects more useful ones. This makes Satoshis held in dusty UTXOs seem even more useless, a literal waste of energy.

“Wasting energy” can be a sensitive issue for some in regards to Bitcoin. Some people already bemoan the energy used by proof-of-work to secure Bitcoin’s transactions. How much more strenuous would their objections be if they knew that large amounts of what Bitcoin secures won’t ever be used?

What is the energy efficiency of Bitcoin’s security?

Is there a concept of an energy efficiency for Bitcoin? The efficiency with which it uses hashpower to protect useful economic assets? One can trivially define an energy efficiency for a Bitcoin miner by treating it like a space heater — but is there a more interesting, blockchain-level definition of the energy efficiency fo the whole Bitcoin network? A definition which recognizes that Bitcoin’s efficiency is less than it might otherwise be because of the presence of dust?

Physics & Economics

Questions about energy efficiency can be stated in terms of thermodynamics and, thus, answered using the tools of physics.

In recent decades there have been many attempts by physicists to use their tools to model economic systems. Sometimes these attempts are beautiful in their simplicity and staggering in scope of their application: billions of dollars are managed by models derived from (or similar to) the Black-Scholes equation, which calculates option prices by analogy to the diffusion of heat through a physical substance.

Other attempts to integrate these fields (“econophysics”) feel like strange, isolated chimeras, rejected by both their parent disciplines.

Are blockchains an amenable subject for the quantitative analyses and theoretical models of physicists? Consider:

Bitcoin, while still small in market cap (and dwindling!), now has 10 years of history and is already large enough to display interesting patterns across many magnitudes of users, investment, price, volume, and value.

Blockchains are also distributed ledgers that record their data pseudo-anonymously, but with sufficient structure to analyze large-scale behavior in precise detail (see our HODL waves post).

Most interestingly, by using large amounts of energy, Bitcoin becomes anchored in the physical world. This provides handholds for physicists to think about the thermodynamics of blockchains.

Blockchains are an unprecedented opportunity for combining insights from economics and physics.

Blockchain as Heat Engine

The combination of these properties suggests that we may want to take the casual statement “dusty UTXOs are a waste of energy” more seriously — indeed, more literally: UTXOs are a “waste” of energy because they aren’t doing any useful “work” for anyone. This lowers the efficiency we seek to measure.

Physicists defined a simple framework for understanding how useful heat, work, and waste (entropy) are related to efficiency in mechanical engines: the classical theory of thermodynamics.

No classical engine is perfect; the extraction of useful work is always accompanied by an increase in entropy, usually manifested as waste heat in the system: a Joule of energy distributed among the molecules of air and fuel in the reaction chamber is more useful than the same Joule of energy present as random vibrations among molecules in the hot exhaust of the engine. An engine’s efficiency is the degree to which an engine avoids producing waste heat in favor of useful mechanical work.

Dusty UTXOs aren’t useful, but they are being secured anyway, just as waste heat in the exhaust of the engine isn’t useful but produced anyway. And just as engineers have designed clever systems to avoid the production of waste heat and to shed it quickly, blockchain engineers are developing smarter wallet software, and blockchain companies are “cooling off” their own dust in an effort to increase the efficiency of the chain (in particular, cooling UTXOs is done in order of their “grain-size” — businesses clean higher-value density dust before lower-value density, as shown by Antoine Le Calvez in When the Bitcoin dust settles).

Making the analogy between dust and waste heat more precise is challenging. The same thermodynamic laws governing engines apply to any system — including a proof-of-work based blockchain. The difficulty is in applying their definitions. What is “work” in the context a bitcoin transaction? How does one measure a blockchain’s “internal energy”? Is Bitcoin in equilibrium? Treating the system as just a bunch of computers making physical waste heat is true, but uninteresting and overly reductive. Is there a level of abstraction at which the domain data of Bitcoin (transactions, UTXOs, price, volume, fees, &c.) can be thought of as a thermodynamic system?

If we had a better theory about the thermodynamics of proof-of-work blockchains, we might be able to answer such questions and define “energy efficiency” for Bitcoin along with a methodology for calculating it from real-world data on energy usage, transaction volume, UTXO creation, price data, fee markets, etc.

A thermodynamic theory of blockchains would be an advance in both economics and physics. Answering the question, “Where does the energy miners input into hashing Bitcoin go?” in a way that helps us understand the economics of Bitcoin using the language of thermodynamics could be a very powerful new framework for understanding the world.