Picture a day at the grocery store: you’ve just bought a carton of milk for $2.50, but all you have is a $5 bill. The cashier takes your bill, hands you back your change, and you put this “unspent money” back into your wallet for future use. This simple, everyday transaction is akin to how Unspent Transaction Outputs (UTXOs) function in the world of Bitcoin.
UTXOs are the fundamental building blocks of bitcoin transactions. A bitcoin transaction consists of inputs and outputs. Inputs are bitcoin that you’ve received, and outputs are bitcoin that you’ve sent to other addresses. The UTXOs are the “unspent” outputs – they are the bitcoin in your wallet that you have received but not yet spent.
This idea might be a little tricky to wrap your head around, but let’s break it down. When you receive bitcoin, the amount is composed of various UTXOs, which are tracked by the Bitcoin network. These UTXOs could be a mixture of different quantities of bitcoin, or satoshis (the smallest unit of bitcoin), gathered at different periods of creation.
Now, suppose you want to make a purchase using bitcoin. Let’s say, for example, you’re buying an e-book online that costs 5,000 satoshis. To make the payment, a UTXO (or a combination thereof) in your wallet is selected to be used. Here’s where things get interesting: you cannot just pick out 5,000 satoshis from a UTXO and send them on their way. Instead, you have to use up the whole UTXO in the transaction.
Let’s imagine your selected UTXO is worth 30,000 satoshis. When you make the payment, the entire 30,000 satoshis are spent: 5,000 go to the e-book vendor, a small portion is deducted for the miner’s fee, and the remainder comes back to you as a fresh UTXO, which is again available for you to spend.
So, do you need to worry about your UTXOs? The short answer is: not always. Some bitcoin wallets, like Sparrow, offer ‘coin control’ features, allowing you to decide which UTXOs to spend in a transaction. However, for most people using standard bitcoin wallets, the management of UTXOs is handled automatically. The wallet software takes care of selecting which UTXOs to use, and the user doesn’t need to think about it.
Another term you might come across while exploring UTXOs is ‘Ordinals’. This refers to the way bitcoin values are stored within UTXOs. Each satoshi in a UTXO can be inscribed with an Ordinal, which can potentially be used for transaction fees by certain wallets.
In summary, UTXOs might seem complex, but understanding them can enhance your appreciation of the clever mechanisms underlying Bitcoin’s operation. Just as you handle cash transactions without worrying about every single cent, Bitcoin wallets manage UTXOs seamlessly, making your digital transactions smooth and easy.
Article with inputs from Franken @ItsFranken (twitter)
