Revaulting: UTXO consolidation issue

[Parsh]

Task Description
Users can create multisig wallets, which we refer to as Vaults. These can be either a standard m-of-n multisig or a miniscript-based multisig configuration.

The Problem: When users perform re-vaulting (i.e., updating the m-of-n scheme, modifying the set of signers, or changing the timelock in a miniscript-based vault), a new vault is created, triggering a migration process. This involves transferring funds from the old vault to the new one. During this migration, all UTXOs from the old vault are consolidated into a single UTXO in the transaction used for the transfer. This creates a significant privacy issue, especially when UTXOs are tagged and selectively used (via UTXO selection) to preserve privacy.

Potential Solutions:
To address the privacy concerns associated with migrating funds from an old multisig vault to a new one, several strategies can be implemented to maintain UTXO privacy:

• Separate Transactions for Each UTXO
  Instead of consolidating all UTXOs into a single transaction, we can create separate transactions for each UTXO. This approach prevents linking all the UTXOs in a single transaction, thereby preserving privacy. However, this method may increase the number of transactions and associated fees.

• Grouping UTXOs with the Same Label
  We can group UTXOs that have the same label or origin into separate transactions. For example, if we have UTXOs tagged as KYC and non-KYC, we can transfer them in separate transactions to avoid mixing these different types of UTXOs. This method helps maintain the separation of funds based on their source and reduces the risk of linking them.

• Broadcasting Transactions at Different Intervals
  To further minimize linkage, we can broadcast these transactions at different intervals. Spacing out the transactions over time makes it harder for observers to associate them with a single migration event. This can be combined with using different IP addresses or VPNs/Tor for each transaction to enhance privacy.

• Silent Notifications(?)