UTXO

Unspent Transaction Outputs (UTXOs) are the fundamental building blocks of Bitcoin transactions. Each UTXO represents a discrete amount of Bitcoin that remains unspent following a previous transaction. When a user initiates a new transaction, they effectively combine one or more existing UTXOs as inputs to create new outputs, which can then be spent or held. This design enables precise tracking of ownership and balances without relying on account-based ledgers.

The UTXO model enhances transparency by allowing anyone to verify the history of each bitcoin unit on the blockchain. At the same time, it supports user privacy since multiple UTXOs can be combined and split, obscuring direct links between senders and recipients. Additionally, this system facilitates efficient transaction verification, as nodes only need to confirm that the referenced UTXOs are valid and unspent, rather than scanning entire account histories.

For example, when sending Bitcoin, the wallet software selects appropriate UTXOs to cover the desired amount plus fees. These inputs are consumed, and new UTXOs are created for the recipient’s address and any change returned to the sender. This continuous cycle of consuming and generating UTXOs maintains an auditable ledger that underpins Bitcoin’s security and decentralization.