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Coin selection is the process of choosing a subset of the UTXOs owned by a wallet in order to create and fund a transaction. When creating a transaction on behalf of a user, a wallet must select specific UTXOs as inputs in the transaction.
For example, if Alice wishes to pay Bob 1 BTC and her wallet contains 5 BTC in various amounts, her wallet must determine which UTXOs to spend. This decision is not trivial, and depends on the priority of the user. Some coin selection methods prioritize spending smaller outputs to avoid dust accumulation while others spend large outputs to pay lower fees. Still others prioritize privacy or avoiding change outputs.
Coin selection is usually dictated by an algorithm built into a wallet, but some wallets allow users to dictate their own coin selection preferences to suit their needs.