🔍 What are UTXOs in Bitcoin?
The UTXO (unspent transaction output) model is at the heart of Bitcoin's accounting system. Unlike traditional bank accounts, Bitcoin does not record "balances," but rather follows a system of inputs and outputs that cancel each other out.
💡 Simple definition:
A UTXO is an amount of Bitcoin received from a transaction that has not yet been spent. It is the digital equivalent of a coin in your pocket: until you spend it, it is an unspent output.
🧾 How does a Bitcoin transaction work?
Every transaction has inputs (previous UTXOs used) and outputs (new UTXOs created).
Bitcoins do not split at the balance level; rather, they are spent in full and reallocated as new UTXOs.
🧩 Main features:
- 🔐 Each UTXO is associated with a public address and can only be spent with its private key.
They are immutable, meaning they cannot be updated. They are consumed, and new outputs are created.
- 🧾 They are single and indivisible; each input must be spent in full.
- 🔄 Traceable: Each UTXO is publicly verifiable on the blockchain.
🛠 Where are they stored?
In the UTXO set, which is a data structure maintained by each full node.
This set contains all valid, expendable UTXOs at a given time.
It is essential for:
- Verifying that a transaction only spends valid UTXOs
- Preventing double spending (spending the same bitcoins twice).
📉 Fees and fragmentation (UTXO management).
Each UTXO takes up space. The more small UTXOs you have, the larger your transaction will be and the higher the fee you will have to pay.
🧮 UTXO optimization:
- Consolidate UTXOs when fees are low.
- Avoid receiving too many fragmented micropayments.
- Manage your portfolio for long-term efficiency.
⚠️ Practical implications:
✅ Pros:
- A transparent, traceable, and verifiable system
- Enables advanced privacy (e.g., with careful input management).
- Forms the basis for advanced features, such as Lightning and coinjoin.
❌ Cons:
- Can become inefficient if poorly managed
- Requires minimal technical understanding for advanced wallets
- Transactions with many UTXOs can be expensive.
🔐 UTXOs and privacy:
Each UTXO is tied to a specific address.
Using UTXOs from different addresses in the same payment can link identities.
💡 Tip: Use wallets that support UTXO handling and input selection, such as Sparrow and Samourai.
📌 In short, a UTXO is a spendable bitcoin.
You receive them from a transaction, spend them in full, and receive new ones.
Bitcoin works as a system of "digital tokens," not as an account balance.
➡️ Understanding UTXOs is essential to using Bitcoin consciously and safely.
❓ What is the Mempool? What is the UTXO set? How do they work, and what changes do they bring?
📶 Stay tuned.
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