What Is an Unspent Transaction Output (UTXO)?
In the world of cryptocurrencies, an unspent transaction output (UTXO) refers to the output of a blockchain transaction that has not been used as an input in a subsequent transaction.
Bitcoin is a well-known example of a cryptocurrency that utilizes the UTXO model.
Decoding Bitcoin Transactions
Each Bitcoin transaction consists of inputs and outputs.
The input represents the address from which the Bitcoin is sent, while the output represents the address to which it is sent.
Users gain ownership of the transaction output when they receive Bitcoin, which becomes an unspent transaction output (UTXO).
This UTXO can be used as input in a future transaction.
Calculating Cryptocurrency Wallet Balance
Unlike traditional banking systems that maintain a running balance for each account, the UTXO model calculates the total balance or wealth in a cryptocurrency wallet by summing up all the unspent transaction outputs.
Conceptually, it is similar to receiving change after making a purchase, which can be used for future transactions.
Ensuring Transaction Validity
In the UTXO model, the total inputs of a transaction must be equal to or greater than the total outputs. Validators in a decentralized system use this as one of the checks to verify the validity of a transaction.
UTXOs enable simple and efficient checks for double spending, making them suitable for decentralized systems.