BitcoinExplained#5

UTXOs - What You Actually Own in Bitcoin

A UTXO (Unspent Transaction Output) is like a digital coin in your wallet. Unlike traditional banking, Bitcoin doesn't track account balances. Instead, it tracks individual coins you can spend.

How UTXOs work :

Each UTXO is like a specific banknote with a fixed value. You can't spend part of a UTXO because it's all or nothing. When you spend a UTXO, you must spend the entire amount. Any leftover value comes back to you as change in the form of a new UTXO. Your wallet balance is simply the sum of all your UTXOs.

Real-world analogy :

Imagine you only have cash bills and no coins. To buy something for $15 with a $20 bill, the cashier takes your $20 and gives you $5 change. You can't tear the $20 bill in half. Bitcoin works the same way because each UTXO is like an indivisible digital banknote.

Example transaction :

You have a 0.1 BTC UTXO and want to send 0.06 BTC to a friend. Your 0.1 BTC UTXO gets consumed entirely as input. The transaction creates two outputs: 0.06 BTC goes to your friend's address, and 0.04 BTC comes back to your address as change (minus fees).

Why this matters :

Your wallet balance is actually a collection of UTXOs rather than a single number. UTXOs can be tracked through the blockchain, which affects privacy. Multiple small UTXOs result in higher transaction fees. Advanced users can choose which specific UTXOs to spend for better privacy and efficiency.

Bottom line :

Bitcoin doesn't have accounts with balances. You own specific digital coins called UTXOs that you can spend entirely or not at all.

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