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You can send bitcoin to the wallet and then create the instruments on the fly. I costs a mining fee to create and from then on you can send it around without any fees. You can also sweep those instruments back to the original address in the wallet or specify another address to sweep to. It's pretty flexible like that.
Still trying to wrap my head around this...
Having the denominated amounts sounds like cash. With fiat when something costs $21 we use a $20 and a $5 bill then get $4 back in change. Would this scheme work in a similar way? Say I want to buy lunch for 21k sats, I'd need one 20k and another 1k to transfer to the merchant. Is that possible?
You don't have do the math yourself - the wallet picks it for you from the most efficient combo. The merchant can keep a bunch ready for change and if not they automatically create the correct amount to send back on demand. The instruments are bound to the range in absolutes so you don't get any small change.
If this concept ends up being too antiquated for the beta tests to validate then we can always switch back to creation on demand where it'll be able to do much smaller accurate atomic amounts.
Say after receiving and spending a bunch of various sat instruments you want to consolidate on chain. Will these amounts be pulled from their origin UTXO into a new TX?
The example given in the whitepaper of 100 instruments at 5 sats/vb was less than a dollar. Surely if you're pulling sats out of a bunch of UTXO's the fees should be a lot higher.
It's just a hardcoded limit - there is not limit - the app has a limit on the amount of notes you can transmit at once depending on the transport. It's really meant for everyday purchase, if you need large sums then bitcoin mainchain standard tx is still the best for that.