What Is the UTXO Model?
An unspent transaction output (UTXO) is the amount of digital currency that remains after a cryptocurrency transaction. You can think of it as the change you receive after buying an item, but it is not a lower denomination of the currency—it is a transaction output in the database generated by the network to allow for non-exact change transactions.
KEY TAKEAWAYS
The UTXO model involves the remaining digital currency after a cryptocurrency transaction is executed, similar to receiving change.
UTXOs are essential in cryptocurrency transactions as they represent unspent outputs reassigned to the sender, ensuring precise currency tracking.
The UTXO model offers increased privacy and full traceability but requires users to occasionally consolidate UTXOs which can incur transaction fees.
Blockchains like Bitcoin, Litecoin, and Bitcoin Cash utilize the UTXO model to manage cryptocurrency ownership and transactions.
UTXOs are not denominations but can be measured in sub-units like satoshis or gwei, facilitating easier transaction handling in diverse scenarios.
How the UTXO Model Functions in Cryptocurrency
UTXO is a protocol for distributing the bits of data that cryptocurrency is made from and can be difficult to understand initially. A cryptocurrency network or developer sees UTXO much differently than a day-to-day cryptocurrency user does.
For example, imagine that 1 BTC is a bucket full of coins. Each coin represents a UTXO. If you purchase something from Bob for .5 BTC, the network will give Bob the entire bucket of coins and send back the .5 BTC you're owed in "change." You now have a UTXO worth .5 BTC that cannot be divided into smaller amounts.
The Network's Perspective on UTXO Transactions
Nearly all transactions create UTXOs because the network must "gather" a user's unspent outputs and send them to the recipient. Thus, it's rare for a user to have the exact amount of UTXO needed. This is similar to looking under the car seat for loose change to pay for the burger at the drive-through and finding a quarter when you only needed a dime—the restaurant must give you back $.15.
FAST FACT
UTXOs are not cryptocurrency denominations, like satoshi for Bitcoin (BTC) or gwei for ether (ETH); however, UTXOs can be measured in these denominations.1
When you initiate a transaction through your wallet, UTXOs with your information are located and unlocked. The new owner's information is associated with the UTXO you transferred to them. They are locked once again, and the user can use them in transactions via the same process.
As transactions occur, the database fills with records showing ownership changes. The outputs assigned to you are fractions of the cryptocurrency you sent to someone that were sent back.
User Experience With UTXO in Transactions
When you decide to spend your Bitcoin, you only see the amount you've spent deducted and the amount left over in your wallet. For you, it's similar to using a $1 bill on a $.50 item—you're given change, you put it in your pocket, and go about your day.
Objectives and Benefits of Using the UTXO Model
Many cryptocurrencies use the UTXO model to help track ownership of each part of the currency. UTXOs link to public addresses visible to the network, maintaining the anonymity for which cryptocurrencies were designed.
Users remain anonymous unless they share their address, but the model still provides transparency through these addresses.
FAST FACT
A transaction encodes the transfer of value from the fund source (your input) to the destination (the output, or the recipient).1
Pros and Cons of the UTXO Model
The UTXO model offers several advantages:
More privacy if used with multiple addresses
UTXO consolidation reduces future fees
Traceable back to the time the bitcoin was given as a block reward
However, the model also has some disadvantages:
It's more difficult to code than accounts
There is less fungibility than in accounts
Requires a user to occasionally consolidate their UTXO (transaction fees involved)
Takes up more digital space
Difficult to understand
What Is A UTXO With an Example?
Unspent transaction outputs are part of the distributed database technology behind Bitcoin and other cryptocurrencies. Bitcoin uses UTXOs, but it is not a UTXO.
What Are the Benefits of UTXO?
It allows for full traceability and more privacy if multiple addresses are used.
Which Blockchains Use UTXO?
Bitcoin, Litecoin, and Bitcoin Cash are examples of blockchains that use the UTXO model.
Importance of the UTXO Model
The UTXO model is crucial for tracking token ownership and facilitating cryptocurrency transactions. Unlike account-based systems, UTXOs allow each transaction's outputs to be redistributed within the network, resembling change received in a cash transaction. Blockchains like Bitcoin and Litecoin employ UTXOs to enhance traceability and privacy, though users may face complexities in understanding and managing these outputs. Overall, UTXOs offer both significant advantages in privacy and traceability, while also presenting some challenges in terms of usability and space requirements.
