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The bitcoin UTXO set appears to have stopped growing on 2017-06-3 after 5 or more years of nearly constant increase. What are the reasons (or hypotheses) why?

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It's hard to know for sure what's been going on. My guess would be it's a mix of :

  • Better coin selection algorithms used by large wallets (exchanges)
  • Increase in fees pushed some inefficient services to stop creating uneconomical outputs (low values). Those services would be gambling/faucets/etc.. They might now be forcing withdrawals to be above a given amount
  • Some services consolidating their wallets since fees have lowered a bit from the last few weeks.
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For the largest part of 2016 we saw rising fee levels. This seemed to bode that a large number of low-value UTXOs would soon become economically unspendable due to their value being outpaced by the cost of creating a transaction input to spend them.

  1. This has strongly discouraged people from creating small outputs.
  2. Use cases entailing microtransactions had reduced volume.
  3. Some large companies have taken notice and started consolidating funds.
  4. Fees hurt enough that wallet developers and companies invested in some coin selection improvements.

After writing this I notice that my answer is pretty much echoing alcio's. Kudos to him, his answer came first.

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Currently its cheaper to create TX's that increase the set, so there was a lot of incentive for wallet to create dust. After Segwit, it's not cheaper anymore if you increase the set.

So my guess is that a lot of wallets already updated their TX creation algorithms for Segwit.

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  • Are you saying it is cheaper to do X than to do Y? If so, can you clarify in your answer, what is the X and what is the Y?
    – Peter
    Commented Jul 11, 2017 at 12:23
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    It's cheaper to create an output (increasing the UTXO set size) than consuming it (reducing the UXTO set size). Segwit fixes that misaligned incentive by making it roughly the same cost. However, I don't think wallets adapted their tx creation algorithm for SW yet, as it is not active.
    – alcio
    Commented Jul 11, 2017 at 12:32
  • @alcio: It's still about two times as expensive with segwit to consume a UTXO vs creating one. Much better, but by no means "fixed", unfortunately.
    – Murch ♦
    Commented Jul 14, 2017 at 3:01
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The number of unconfirmed transactions lowered (due to significant growing hashrate) and miners ready to confirm low-priority transactions where inputs count is more than output count.

For example, take this block https://blockchain.info/block/0000000000000000003058a04965c989c929352002b792f83c7274247e15eca7 and scroll to the bottom. You will see transactions which combine small inputs. Such combining has the reason when done with small fees

So, the number of UTXO lowers (or grows slower) when the network is not busy

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My guess, is that it's a consolidation of a lot of 0-small fee transactions that just built up for a long time. Once the mempool emptied, then all the dust got cleaned up into fewer transactions outputs.

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