What is the UTXO Model?
An unspent transaction output (UTXO) represents the amount of digital currency remaining after a cryptocurrency transaction. You can think of it like the change received after making a purchase, but instead of being a lower denomination of currency, it is a transaction output documented in the network’s database to manage non-exact change transactions.
The portion of the entire cryptocurrency that remains unspent in a transaction serves as an essential measure for accurate accounting, akin to double-entry accounting where each transaction presents an input and an output.
For example, if you consider 1 BTC as a bucket full of coins, each coin signifies a UTXO. When you purchase an item from Bob for 0.5 BTC, instead of giving Bob exactly 0.5 BTC, the network gives Bob the full bucket and then returns the remaining 0.5 BTC worth of coins back to you as “change.” This process creates a new UTXO worth 0.5 BTC, which cannot be divided into smaller amounts.
Key Insights
- A UTXO is the remaining digital currency after executing a cryptocurrency transaction.
- UTXOs are processed continuously, forming the basis of each transaction’s completion.
- After a transaction is completed, any remaining outputs are listed as inputs for future transactions within the database.
Digging Deep into the UTXO Model
The UTXO scheme outlines the method for fragmenting the data blocks from which cryptocurrencies are composed and can be intimidating to comprehend at first glance. The perception of UTXOs can vary significantly between network operators or developers and everyday cryptocurrency users.
Network Perspective
A cryptocurrency transaction involves transferring information within a distributed database. Cryptocurrency gets split into tiny chunks called unspent transaction outputs scattered throughout the database. Most transactions generate UTXO as they rarely involve exact amounts.
While processing a transaction doesn’t utilize a single data byte but rather multiple cryptocurrency fractions, which are temporarily accumulated to satisfy a spending request, UTXOs don’t represent cryptocurrency denominations (like satoshi for BTC or gwei for ETH) yet can be measured by these standards.
When initiating a transaction through a digital wallet, UTXOs linked to your account get located, unlocked, and then reassigned to the new owner. These UTXOs are then locked again, ready for potential future transactions in the same fashion.
As transactions continually refresh, the blockchain fills with updated records denoting changes in ownership. Outputs, the fractional cryptocurrency portions sent to others, are recorded as inputs for forthcoming transactions.
User Perspective
As a user, spending Bitcoin feels as if spending traditional currency, where only the balance gets updated; the immediate transaction output (the leftover Bitcoin) moving back into your wallet is unseen. Analogous to spending a $1 bill on a $0.50 item—you provide a $1 bill and get back $0.50 in change, which then becomes a part of your next transaction pool.
The Goals of the UTXO Model
Persistently adopted by several cryptocurrencies, the UTXO model offers transparency by associating UTXOs with public addresses within the network. Although designed for anonymity—precluding user identification unless willingly disclosed—the model records value transfers from the input (fund source) to the output (receiver).
Challenges within the UTXO Model
The widespread distribution of minor coins within a cryptocurrency can sometimes pose economic challenges. Scenarios arise where transaction fees surpass the transaction value, making it counterproductive (e.g., inefficient to buy a $2 coffee if Bitcoin’s transaction fee exceeds the product cost).
FAQs
Is Bitcoin a UTXO?
Bitcoin’s network extensively employs UTXOs, fundamental to the distributed database technology behind many cryptocurrencies; however, Bitcoin itself is not a UTXO.
Is Ethereum a UTXO?
No, Ethereum does not use the UTXO model but employs an account-based approach preserving account balances. The Ethereum Virtual Machine hence doesn’t include UTXOs.
What role do UTXOs play in Blockchain?
UTXOs comprise small, unspent cryptocurrency portions resulting from transactions recorded in the database, applicable towards later transactions. They form a critical ledger transaction history maintained within specific cryptocurrency systems.
Related Terms: double-entry accounting, satoshi, gwei, account balance.
References
- O’Reilly. “Mastering Bitcoin: Chapter 5. Transactions”.
- Ethereum. “Ethereum Accounts”.
