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When constructing a new transaction, I have reached the function cryptonote_core/cryptonote_tx_utils.cpp/construct_tx_with_tx_key() and I am trying to understand where the decoys came from? How and when are they selected?

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The fake outputs are selected by the wallet in the wallet2::get_outs function, in src/wallet/wallet2.cpp.

https://github.com/monero-project/monero/blob/master/src/wallet/wallet2.cpp, currently starting at line 6411.

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