In blockchain and cryptocurrency terminology, “Unspent Transaction Output” (UTXO) refers to the output of a transaction that has not been spent or used as an input in a subsequent transaction. UTXOs play a crucial role in blockchain systems that use the UTXO model, which is different from the account-based model used by some other blockchain platforms like Ethereum.
Here’s how UTXOs work:
Outputs and Inputs: In a blockchain transaction, the cryptocurrency being transferred is sent from one or more input addresses to one or more output addresses. The input addresses are the sources of the funds, and the output addresses are the destinations.
UTXOs: Each output of a transaction, which represents a specific amount of cryptocurrency, is treated as a UTXO. UTXOs are like digital coins or tokens that can only be spent once. When you make a transaction, you must use one or more UTXOs as inputs to fund the transaction.
Spending UTXOs: To spend cryptocurrency, you create a new transaction that references one or more UTXOs as inputs. These UTXOs are consumed in the process, and you can send the remaining balance (change) back to your own address. If the sum of the inputs exceeds the amount you want to send, the excess becomes a new UTXO assigned to the receiving address.
Change: When you spend a UTXO with a higher value than the amount you want to send, the remaining value becomes a new UTXO, which is typically sent back to your own address as “change.” This ensures that UTXOs are fully utilized and not wasted.
UTXO Set: The collection of all unspent transaction outputs in the blockchain forms the UTXO set. This set continually evolves as new transactions are added to the blockchain, and UTXOs are spent or created.
The UTXO model is commonly used in blockchain networks like Bitcoin. It offers advantages such as increased privacy, as every transaction creates a new set of UTXOs, making it harder to trace the flow of funds. Additionally, UTXOs can be processed in parallel, which can improve the scalability of the network. However, it can be less intuitive for developers compared to the account-based model used in some other blockchains.