How UTXO Works: The Building Block of Bitcoin Transactions

Think of Bitcoin transactions like writing cheques. Every time you send Bitcoin, you’re not dividing a coin – you’re working with a collection of previous transaction outputs. This is where the UTXO (Unspent Transaction Output) model comes in. It’s the fundamental mechanism that Bitcoin and many other cryptocurrencies use to track where every coin is at any moment.

Understanding UTXO: The Core Concept

An unspent transaction output is essentially an amount of Bitcoin sitting in a wallet that hasn’t been spent yet. When you make a transaction, you’re taking one or more of these UTXOs as inputs, digitally signing to prove you own them, and creating new outputs that become UTXOs themselves. The old ones are now “spent” and permanently locked away – they can never be reused. The new ones are ready to be spent in future transactions.

A Real-World Example: Alice Pays Bob

Let’s say Alice holds 0.45 BTC. This isn’t one unified coin – it’s actually two separate UTXOs from past transactions: one worth 0.4 BTC and another worth 0.05 BTC. Now she needs to send 0.3 BTC to Bob.

Here’s what happens: Alice can’t just give Bob half of her 0.4 BTC UTXO. Instead, she must use the entire 0.4 BTC unit as an input. She instructs the network to split it: send 0.3 BTC to Bob’s address and return 0.1 BTC to her own address (minus mining fees in reality). The original 0.4 BTC UTXO is now spent and gone forever. Two brand new UTXOs have been created (0.3 BTC and 0.1 BTC), ready for the next transaction.

What if Alice needed to send 0.42 BTC instead? She could combine her 0.4 BTC UTXO with the 0.05 BTC UTXO to create a total of 0.45 BTC, send 0.42 BTC out, and keep 0.03 BTC back as change.

Why UTXO Matters

The UTXO model is why Bitcoin transactions work the way they do. Rather than updating account balances like traditional banking, the blockchain tracks discrete outputs. Each output is addressed to a specific person’s address. UTXOs can’t be partially spent – you must create new outputs from existing ones, much like tearing up an old cheque and writing new ones based on its value. This design ensures transparency, prevents double-spending, and gives every Bitcoin a clear history on the blockchain.