In the crypto space, UTXO or unspent transaction output refers to a blockchain transaction output which hasn’t been utilised as an input in a new transaction. The UTXO model is a fundamental element of several cryptocurrencies, including Bitcoin.
Take a look for more details.
Understanding Unspent Transaction Output (UTXO)
UTXO is a technical term that signifies the amount of a digital coin which remains back after you conduct a transaction. You can consider it a change you would receive once you buy an item. But in this case, the UTXO is a transaction output generated by the blockchain network to facilitate non-exact transactions.
Each transaction of crypto will have an input and an output.
The following example would prove to be very helpful in explaining this.
Suppose Nancy has got 0.45 BTC in the wallet. This is not a fraction of a coin but a collection of UTXOs, mainly two UTXOs worth 0.4 BTC and 0.05 BTC. These are outputs from previous transactions. Now let’s suppose that Nancy has to pay 0.3 BTC to John.
The only option she has is to break the 0.4 BTC unit, send John 0.3 BTC, and return 0.1 BTC to herself. Owing to transaction fees, she will reclaim fewer than 0.1 BTC. But for now, let us leave that out and simplify the situation.
Nancy generates a transaction which conveys to the network to take an input of 0.4 BTC UTXO, break it up, send 0.3 BTC of it to John’s address and return 0.1 BTC to her address. The 0.4 BTC cannot be reused as it is a spent output. In the meantime, two new UTXOs have been generated (0.1 BTC and 0.3 BTC).
In this example, we broke up a UTXO. Now let’s suppose that Nancy had to pay 0.42 BTC. In that case, she could have easily combined her 0.4 BTC with another 0.05 BTC to create a UTXO worth 0.42 BTC and return 0.03 BTC to herself.
Goal of the UTXO Model
The UTXO model finds its use in several cryptos, enabling users to track ownership of every portion of that crypto. As cryptos offer anonymity, UTXOs are linked with public addresses, which are visible to the complete network.
It is worth noting that it is impossible to identify users from their owners if they don’t advertise their address. However, this model permits transparency through the addresses.
Wrapping it up
To sum up, the UTXO model acts as the mechanism of the protocol to keep track of where coins are present at a given time. In a way, you can consider them to operate similar to cheques – they are addressed to particular users. Also, it is not possible to spend UTXOs in part. Instead, new ones generate from the old ones and are accordingly passed along.
