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What is a UTXO?

Think of it like a dollar bill in your wallet. Some are bigger like $20, $50 while others are smaller $1, $5.

Bitcoin has the same thing, except digitally. To pay for a 0.1 BTC item, you pay with 1 BTC but get 0.9 BTC back as change. You now have a 0.9 BTC UTXO (Unspent Transaction Output). Your digital wallet sums up all the UTXOs in your wallet in order to show your balance, but in truth they are distinct.

The fee for making a transaction in bitcoin is based on the data usage and the more UTXOs involved, the more data used. So, right now people are spending their small UTXOs into a payment to themselves to combine their $1 bills into $100 bills.

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Discussion

Nika 2y ago

Thank you! This made it click for me! So, UTXOs are like individual dollar bills, and for convenience, a wallet tallies them up into a single number for me. If I want to pay for something that is smaller than my smallest UTXO, it's like if it was possible to tear a paper bill in half, where the person I paid gets part of it, and I get part back as change, and it's still separate from the other "bills" in my wallet?

Jestopher 2y ago

Exactly!

When it gets really small to the point where it's not worth the data cost to spend it, it's called dust. Thankfully dust doesn't really matter when you only use lightning. It only matters on-chain.

MattA 2y ago

Muteness 2y ago

in your opinion what is the best UTXO management?

Jestopher 2y ago

It's tradeoffs for everyone. It's penny wise to consolidate at inexpensive times (like now). It also has privacy implications since all your onchain transactions are now clearly related to each other.