The UTXO Model
The Unspent Transaction Output Model Explained In Simple Terms, Unspent Transaction Output (UTXO) is the technique employed by the Bitcoin protocol to monitor and update balances as they are transferred between crypto wallets. When it comes to managing and keeping track of individual crypto balances, most blockchain-based protocols rely on one of two primary accounting models: the Account/Balance model and the Unspent Transaction Output model (UTXO).
The Account/Balance model updates balances in real-time as transactions are processed and is used by platforms like Ethereum, Tezos, and EOS. The Unspent Transaction Output (UTXO) model is used by Bitcoin, Dogecoin, Litecoin, Cardano, and many other cryptocurrencies, but what is it exactly? How does it work? Let’s find out!
What Is The UTXO Model?
Developed by two of the members of the Cypherpunk cryptography group Adam Back and Hal Finney between 1997 and 2004, in simple terms, a UTXO is best described as the unspent funds –also referred to as leftover or unused cryptocurrency in a transaction. The reason why these funds are called “transaction outputs” is that they were created from previous transactions, and they are “unspent” because they can be freely spent later or sent to someone else.
How Does It Work?
Now this is where things may get a little complicated!
In this model, outputs from previous transactions become inputs for new transactions. What does it mean?
Imagine you buy lunch with a $20 bill and get $10 in change. This leftover $10 is similar to an unspent transaction output as it can be later used to buy something else. One thing about UTXOs is that they cannot be subdivided and have to be spent in full. For instance, if you have a 10 BTC UTXO and want to send 2 BTC to someone, you would have to send your entire 10 BTC and get a new UTXO with 8
BTC, just like in the example above. When an UTXO is spent, it is considered consumed and is essentially removed from circulation. As a result, the leftover change is generated as a brand new, distinct UTXO, helping protocols like Bitcoin prevent double-spending.
Why The UTXO Model Matters
The Unspent Transaction Output model is at the heart of Bitcoin’s decentralized architecture, enabling fast, secure, and transparent transactions. Its efficiency, scalability, and security make it a crucial component of Bitcoin’s success and a key factor in its widespread adoption.
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