In fiat banking, a materiality threshold is defined as the minimum level of financial impact that triggers reporting, disclosure, or action by a financial institution. This threshold helps banks determine which transactions, events, or information are significant enough to be included in their financial statements, regulatory filings, risk assessments, or other reporting requirements.
In #Bitcoin, we define it as the level above which the counter-party risk of holding funds at a financial institution or exchange becomes significantly intolerable. A preassigned withdrawal or materiality threshold should trigger an onchain settlement transaction that enforces sovereign ownership of large enough cash balance.
This value is subjective. Users must assess their own thresholds based on risk tolerance, network fees, the frequency at which they wish to spend or liquidate funds without incurring onchain fees, and trust in their chosen custodians.
The threshold also determines the size of their materialized bitcoin capsule (UTXO). This is important because owning relatively small capsules is not ideal in the long run, as network fees should always be expected to rise over time.
These are important economic considerations, and in our app Cypherbox.io users can freely adjust the threshold while also receiving warnings if they proceed beyond or exceed the recommended range (1 to 10 million sats).