Coinbase Accused of Incompetence After Hoarding Millions of UTXOs

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Unspent Transaction Outputs UTXOs aren’t something a single user needs to worry about. Every time a user sends a transaction, their wallet is supposed to package up the shrapnel in the most efficient way possible. Smart use of UTXOs is like using the change in your pocket to buy a beer. Or to put it another way, if you were to break a £50 note every time you bought a Mojito at a cocktail bar, you’d finish the night with bulging pockets filled with change.

Coinbase seems to have accumulated an huge amount of UTXOs, which is consequently taking its toll on the bitcoin blockchain. The more UTXOs there are, the bigger the size of the transaction in bytes. Although a bitcoin transaction can contain hundreds of inputs and hundreds of outputs, this comes at a cost. The more inputs and outputs a transaction has, the larger the data size of the transaction.

It’s beneficial to optimise UTXOs, to prevent blockchain bloat, support high transaction volume, maintain privacy, and minimise transaction fees. Inefficient use of UTXOs leads to fuller blocks, further complicating the scaling problems that have been the thorn in the backside of bitcoin. This combined with Coinbase dragging its heels over Segwit has caused some controversy, with many people expressing their frustration or loss of trust at Coinbase.

Some even went as far to subliminally suggest Coinbase are partial to a spot of inside trading.

Some are going even further and saying that you need to get your crypto out of Coinbase (as there are unsubstantiated rumours that Coinbase is heading towards insolvency circulating)

Segwit’s defining feature is its ability to compress transaction data, thereby reducing fees by between 30 and 40%, but Coinbase has been conspicuously absent from the Segwit party. There’s been talk of them implementing Segwit in 2018, but that’s about as precise as they’ve got.

Coinbase has one wallet containing 265 BTC with 1.5 million UTXOs, and on several occasions in the past year has sent transactions where the fee was greater than the coins. One data analyst, LaurenMT, opines that neither Segwit nor Lightning Network would help here – the best solution, he advocates, is bigger blocks. That’s the model most famously used by bitcoin cash, and as anyone who’s been following the scaling debate knows, Coinbase isn’t big on big blocks.

To have over a million Unspent Transaction Outputs associated with one address – regardless of the amount of bitcoins it contains – is astonishing. LaurentMT pointed out that this would mean the combined transaction fees for all of the UTXOs would cost more than the value of the coins in the wallet.

Podcaster Trace Meyer was particularly scathing of Coinbase and its failure to batch transactions and consolidate UTXOs, concluding: “Bitcoin needs less whining & more competent coding”.

Coinbase has had a tough week, what with accusations of insider trading and the ire of traders who lost money when Gdax shutdown as bitcoin cash hit an all-time high. It is an exchange that moves at its own pace. This cautious approach often makes Coinbase last to the races: last to add Segwit, last to distribute bitcoin cash, and last to add altcoins.

“By being thoughtful blockchain engineers we can at least prevent the UTXO set from growing faster than is needed,” wrote Jameson Lopp in 2015. Many are of the opinion that Coinbase seems to have missed the memo, and their failure to clean up digital dust is costing the company money – while doing nothing for the blockchain that everyone relies on. Before Coinbase can look at Segwit, it seems they need to refine their existing codebase.

It is important to remember that Coinbase is only a four and a half year old company that has grown at a phenomenal rate, it’s inevitable any company scaling as fast would experience growing pains, especially one in such a new space. As much as people are currently knocking Coinbase I for one have been impressed as a user, so far. The pain points around blocks on buying and selling haven’t phased me very much as I am holding longterm as I believe in the underlying technology. Also, I recently tried Litebit.eu and that was a terrible experience, so believe me the grass isn’t greener elsewhere, especially for newbies!

Perhaps rather than be vultures surrounding a company clearly having problems and question their integrity, maybe we should support them and hang in there. I don’t believe that Top Tier VC’s such as Andreessen Horowitz, Draper Associates, Greylock Partners, plus institutional investors such as Bank of Tokyo Mitsubishi UFJ would invest and just sit back if there was anything sinister happening…. other than a startup trying to keep up with their own success, which many would view as a nice problem to have and we all know most startups don’t even make it past the first year!

One thing I am sure about is Coinbase CEO Brian Armstrong is going to be having a few late nights, working out how they continue to be a rocket ship. Like Ben Horowitz’s famous quote “As a startup CEO I slept like a baby. I woke up every 2 hours and cried” certainly comes to mind!

Disclaimer:
I’m a relatively happy Coinbase user, but I also use other platforms.
I have positions in Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC) and Ripple (XRP) not enough to buy a Ferrari, but enough to have some skin in the game and capture my attention.

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