Will Schnorr signature incentivise different practices in coin selection? How do they impact the utxo set in the long run?


Yes, Schnorr signatures are generally slightly smaller than ECDSA signatures.

A comprehensive Coin Selection algorithm should therefore e.g. prefer an input with a Schnorr signature at high fee rates and should prioritize using up non-Schnorr input at lower fee rates to minimize costs.

In combination with the signature aggregation, we may generally see more consolidation and batching transactions, and may additionally see a market for creating multiparty transactions, as combining multiple transactions will lead to a lower overall cost.

I would expect the UTXO Set to shift from old style UTXO to newer, more efficient formats over time, but whether the growth of the UTXO set would be impacted and how, is difficult to predict.

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