UTXO, or Unspent Transaction Output, is a key part of the Bitcoin blockchain and many others. It shows how much cryptocurrency is left after a transaction, which you can use for future transactions.
In the UTXO model, Bitcoin transactions work like cash transactions in the real world. For instance, if you purchase something for $10 using a $50 bill, you give the $50 and get back $40 in change, which could be four $10 bills. Those four $10 bills will stay as they are until you use them again, possibly splitting them up further.
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Unlike account-based models such as Ethereum, UTXO-based systems don’t keep track of balances in a straightforward way. Instead, they focus on a list of unspent outputs. This approach boosts security, privacy, and scalability by enabling transactions to be verified simultaneously and lowering the chances of double-spending. Each UTXO is distinct and can only be used a single time. Once it’s spent, it gets taken out of the UTXO set and is substituted with new outputs from the transaction. This method guarantees transparency and simplifies blockchain audits.
The Pros of UTXO
- Improved Privacy
- Parallel Processing
- Inscriptions (Runes, Ordinals, BRC-20 and more!)
The Cons
- Higher Transaction Fees
- Lack of Smart Contract Flexibility
Conclusion
UTXOs are essential to the structure and function of Bitcoin and similar blockchains. They provide a secure, transparent, and decentralized way to track ownership of cryptocurrency. By understanding UTXOs, users gain deeper insights into how transactions work and how balances are calculated within a blockchain system.