What is UTXO?

UTXO is one of the main basic and widely demanded concepts in the world of cryptocurrencies, but not everyone knows and understands this term. In this article, we will analyze the term UTXO, where and for what it is used and how it stands for. UTXO (unspent transaction output) - output of unspent transactions. In simple words, this is the amount of coins that is returned to the user's wallet as change, forming a balance that can be spent in the future or comes from other wallets. The concept of UTXO is easy to understand by examining the basis of cryptocurrencies.

Let's look at this using Bitcoin as an example.

You open a cryptocurrency wallet and see the balance of 10 bitcoins. Although you can see the total, it can consist of a single UTXO or several. If you have a more or less advanced wallet like Samurai Wallet or Coinomi, you can go to the menu, select Show Unspent Outputs and see all UTXOs and on which wallets they are located.

For example, we have 4 UTXOs with amounts of 1 BTC, 2 BTC, 5 BTC, 5 BTC.

At one point, you want to exchange bitcoin for dollars in your favorite exchanger for 4.5 bitcoins. What to do in this case? We choose a UTXO with a total of 5 bitcoins and send 4.5 bitcoins. The network creates a transaction with two amounts: 4.5 BTC, which go to the addressee and 0.5 BTC, which are returned back to your wallet. In less advanced wallets, there is no way to choose which UTXO to spend. In this case, the choice of the amount will be at the discretion of the application. In any case, exactly as much will be sent as needed, the rest will be returned in the form of change to your wallet.

UTXO Fees

When creating a payment in bitcoin, a commission arises for miners, which is necessary to confirm the payment. The UTXO is clearly formed as follows:

New UTXO = old UTXO amount - transaction amount - commission for miners.

Pros of UTXO

The principle of withdrawing unspent transactions allows you to keep track of the balances that have not yet been spent. This makes it possible to simplify calculations in the blockchain, since storing information about all transactions in a block is a more costly and more resource-intensive process. Since the block size is limited, the goal of cryptocurrency developers is to reduce the information that enters the blockchain. This helps to increase the speed of transaction processing and reduce the size of the entire blockchain. Recall that the introduction of Segwit has reduced the network load by 75%.

Also, this concept allows you to create smart contracts, develop and optimize the work of decentralized exchanges, develop new technologies based on the blockchain.

Disadvantages of UTXO

The disadvantages of UTXO include the deanonymization of incoming transactions when sending an outgoing transfer. We figured out how to deal with this in the article "What is a dust attack".

Also, the disadvantages of this approach include the confusion of the process for an ordinary novice user. We recommend that you learn the basics of a particular cryptocurrency before using it.