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What is UTXO? The Importance of the UTXO Model

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UTXO (Unspent Transaction Output) represents the remaining amount from a previous transaction that can be reused in subsequent transactions. It serves as the foundation for the operational model of many blockchains, most notably Bitcoin.

Other blockchains also utilize UTXO but customize it to leverage their unique advantages:
– Sui uses OwnedObject, which is similar to UTXO.
– Cardano employs the extended UTXO (eUTXO) model.
– Fuel optimizes UTXO with custom components like witness.

👉 Explore how UTXO powers blockchain transactions

How UTXO Works: A Practical Example

To simplify, imagine UTXO as a piggy bank vs. a bank account:

UTXO in Action: Alice’s Bitcoin Transactions

  1. Initial Transfer: Alice receives 2 BTC from a CEX to her wallet.
  2. Input (Tx1): None

  3. Output (Tx1): Alice receives 2 BTC.

  4. First Split: She sends 1 BTC to Wallet A and keeps 1 BTC.

  5. Input (Tx2): Output of Tx1

  6. Output (Tx2): 1 BTC to Wallet A + 1 BTC returned.

  7. Second Split: She sends 0.6 BTC to Wallet B and keeps 0.4 BTC.

  8. Input (Tx3): Remaining 1 BTC

  9. Output (Tx3): 0.6 BTC to Wallet B + 0.4 BTC returned.

  10. Final Transfer: She sends the remaining 0.4 BTC to Wallet C.

  11. Input (Tx4): 0.4 BTC
  12. Output (Tx4): 0.4 BTC to Wallet C.

This demonstrates UTXO’s traceability and transparency.

UTXO Splitting: Handling Imprecise Amounts

If you need to send 0.8 BTC but hold:
– A single UTXO of 1 BTC: Split into 0.8 BTC + 0.2 BTC.
– Two UTXOs of 0.6 BTC and 0.4 BTC: Combine or partially spend.

Challenge: High fees on Bitcoin make splitting costly. Solutions like Luminex simplify UTXO management.

UTXO vs. Account-Based Models (Ethereum)

Feature UTXO (Bitcoin) Account-Based (Ethereum)
Security High (parallel checks) Smart contract risks
Scalability Limited by block size Higher throughput
Complexity Manual UTXO management Auto-balance tracking
Fees Higher per transaction Gas-optimized

👉 Discover blockchain models in-depth

Pros and Cons of UTXO

Advantages

  • Privacy: No linked account history.
  • Parallel Processing: Multiple UTXOs can be verified simultaneously.
  • Transparency: Immutable transaction trails.

Disadvantages

  • Storage: Larger blockchain size due to unused outputs.
  • Usability: Requires active UTXO management.

FAQs

1. Why does Bitcoin use UTXO?

UTXO ensures security and auditability by treating each output as an independent, verifiable unit.

2. Can UTXO be reused?

No. Once spent, a UTXO is marked as “used” and removed from the pool.

3. How does UTXO prevent double-spending?

Each UTXO is uniquely referenced and destroyed after spending.

4. Which blockchains don’t use UTXO?

Ethereum, Solana, and BNB Chain use account-based models.

5. Is UTXO better than account-based?

Depends on use cases: UTXO excels in security; account-based suits smart contracts.

6. How do wallets track UTXOs?

Wallets scan the blockchain to aggregate unspent outputs linked to your address.

UTXO remains pivotal for decentralized ledgers, balancing security and transparency. For advanced UTXO tools, check out 👉 OKX’s blockchain solutions.

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