What is UTXO and Why You Should Know About it?

If you are familiar with blockchain or use some digital coins before, you may hear of the word UTXO.

The UTXO stands for Unspent Transaction Output, which means an output of a blockchain transaction. This has not been spent and can be used as an input in a new transaction.

When you use some digital wallets, you may see there is an account balance number or IDs. Actually, if it is a UTXO based blockchain, there is the concept of account balance.

Unspent just means that the receiving address has not used those coins yet. It is a good thing. It means that you can use the same in future.

So, the stored number is aggregated by the wallet application itself and the source it uses is the UTXO. The concept of the UTXO is very similar to the wallet in real life. Let’s think you open your wallet, you see 1000 dollars. You do not know where the 1000 dollar comes from.

Then, you want to spend 100 dollars from your wallet to buy groceries. After spending 100 dollars you get 900 dollars as change. Then the UTXO you have is 900 dollars. The 100 dollars you spent to the grocery shop becomes a UTXO to him until he spends it on his next transaction.

In the early Bitcoin days, this concept was considered pivotal. So much so that if you did not understand UTXOs correctly. You could have made a transaction you never intended to in the first place.

You always need a UTXO or an unspent transaction output to make a transaction. If you don’t have an unspent transaction output, it simply means you don’t have any Bitcoin.

**Only Unspent Transaction Outputs, or UTXOs, can be used to be spent as an input in another transaction whereas spent outputs are already spent hence can’t be spent again.**

You might be wondering that you never make two transactions in your wallet when you pay someone. Yes, that’s true because modern wallets take care of everything behind the scenes.

In short, when a bitcoin transaction takes place, there are two UTXOs created: one that is the actual coins sent to the recipient, and one that is the change output, which goes back to the sender’s wallet.

Hence if you notice, the public address of initial balance and the final one is different. This is why a lot of users get confused when they observe that their wallet address changes every time they make a transaction.

This happens because HD wallets automatically send the change to a different change address so that you can secure your privacy. So next time you see your address changing, you know it is happening because you are receiving new UTXOs on a new change address!

Benefits of using UTXO

Higher degree of privacy: If a user uses a new address for each transaction that they receive then it can be difficult to link accounts to each other.
Potential scalability pattern: UTXOs are more theoretically compatible with certain kinds of scalability paradigms.

We can say it with confidence that you now understand how UTXOs or the change process is managed in Bitcoin transactions! For more assistance, reach out to us at [email protected].