What is UTXO in Bitcoin?

UTXO stands for Unspent Transaction Output. A UTXO is a non-spent output of a blockchain transaction used to input a new transaction. It is similar to a coin because it has a specific value in its particular currency. For example, Bitcoin is a cryptocurrency that employs the UTXO mechanism.

Summary (TL;DR)

  • UTXO stands for Unspent Transaction Output. A UTXO is a non-spent output of a blockchain transaction used to input a new transaction.
  • UTXOs may be thought of as a currency box that can hold any amount of money.
  • The total number of UTXOs in a blockchain constitutes a set; each transaction consumes components from this set while creating new ones that are added to the set.
  • Transactions from different UTXOs can be processed simultaneously.
  • The Account or Balance model is comparatively more accessible and faster even though UTXO has better privacy.
  • UTXO has various drawbacks, the most notable of which is its complexity which adds to the processing time.

How is UTXO related to Blockchain?

A UTXO is a set of coins that have been locked up. UTXOs may be thought of as a currency box that can hold any amount of money. Once you have some Bitcoins, all you have in the Blockchain is a handful of UTXOs. The Blockchain contains a comprehensive record of all network transactions. By tracing across them, we may form what is known as a transaction history graph. In this way, every output can be traced back to the instant it was created via a cryptocurrency transaction.

Also read, What is Blockchain? A Simple Guide for Dummies

How does UTXO work?

Let’s understand this with an example. Consider a wallet with 3 BTC in total and comprising two separate UTXOs: 2 BTC and 1 BTC. These two UTXOs reflect Bitcoins he got in two earlier transactions and may be viewed as two different denominations in the wallet. He sends a friend 3 BTC. 

Another example: Suppose Pepe has to pay XoXo 14.5 BTC. The first step would be Pepe would look for the UTXOs that sum up to at least 14.5 BTC. Now, ideally, he wouldn’t get exactly 14.5. Let’s say Pepe enters the transaction with 15 BTC (3+4+8). Now moving ahead, there would be two outputs generated. One is, 14.5 BTC that’ll be sent to XoXo address and the other 0.5 BTC that’ll be sent to Pepe’s address.

How Utxo Works
How UTXO works

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What is meant by the UTXO set?

The whole number of UTXOs in a blockchain constitutes a set; each transaction consumes components from this set while creating new ones that are added to the set. Consequently, the set represents all of the coins in a particular cryptocurrency system. The total supply of a coin at a given point in time may be calculated by adding the whole collection of UTXOs. 

UTXOs are a subset of only unspent outputs, which may be used to fund subsequent transactions from a legitimate blockchain. To prevent double-spending and fraud, the condition that only unspent outputs be utilized in subsequent transactions is required.

Utxo Set
UTXO Set

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Differences between UTXO and Account Model

UTXOAccount/Balance Model
Used by Bitcoin and runs on verification.Used by Ethereum and is computational.
A user’s wallet maintains a list of unspent transactions connected with all of the user’s addresses, and the wallet’s balance is determined as the total of those unspent transactions.The Account/Balance Model is more efficient since each transaction has to confirm that the sender has enough currency in the wallet to complete the transaction.

Pros and Cons of UTXO 

ADVANTAGES DISADVANTAGES 
Transactions from different UTXOs can be processed simultaneously. When a user needs to know the entire worth of possessed coins, it is far quicker to check the balance immediately than to collect and count all of the coins, and it is very complex.
As long as users utilize different addresses for each transaction, UTXO gives a better level of privacy. However, more complicated systems, such as ring signatures, might be explored if further secrecy is required.It’s incompatible with the creation of Smart Contracts.
UTXO transactions cannot be duplicated, and the transaction’s sequence and dependencies can be easily checked if the transaction has been processed.A UTXO transaction takes up a comparatively more prominent space and memory as witness scripts exist for each transaction. 

Conclusion 

Unspent transaction output is referred to as a UTXO. Only unspent outputs from a legitimate blockchain system (such as Bitcoin) can be utilized as transaction inputs in a transaction. When a transaction occurs, inputs are removed, and outputs are produced as new UTXOs that can be consumed in subsequent transactions.

Frequently Asked Questions

What is UTXO?

A UTXO is a transaction output that has not yet been spent. Only unspent outputs can be used for an accepted transaction in a blockchain system (such as Bitcoin).

Which cryptocurrencies use UTXO and which don’t?

Bitcoin, Bitcoin Cash, and Litecoin employ the UTXO mode; whereas Ethereum and Ethereum Classic employ the account model because it is concerned with the deployment of smart contracts.

Is UTXO the same as Blockchain?

UTXOs, in layman terms, are the remaining currency after the completion of a crypto transaction, and the Blockchain contains a comprehensive record of all network transactions.

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Suryansha Rawat

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