Why is the witness data fee discounted by a factor of four? I've read that it encourages users to consolidate UTXO sets. How would it be doing that?
Witnesses do not need to be stored once they have been verified and can be discarded. This effectively reduces the size of the UTXO. The discount is supposed to account for the reduced storage requirements and to encourage users to switch to segwit, benefiting the network as a whole.