An unspent transaction output (UTXO) is a critical concept in the crypto space that shouldn’t be overlooked. Find out what it means here!
What Is An Unspent Transaction Output (UTXO)?
An unspent transaction output (UTXO) is a technical term that refers to the amount of digital currency that remains after a crypto asset transaction was completed.
What You Need To Know About An Unspent Transaction Output (UTXO)
At first glance, the unspent transaction output (UTXO) definition may seem like it is the crypto analog to the change a person gets after buying an item with fiat money. However, it is not the same – a UTXO isn’t a smaller denomination of a currency but rather an output in the database designed to enable non-exact change transactions.
Let’s take a look at how the unspent transaction output (UTXO) concept works in more detail. Due to their high value, cryptocurrencies are hardly ever transferred as entire coins. Instead, users buy and sell fractions of digital assets.
This is where the unspent transaction output (UTXO) model comes in. Crypto transactions are made up of inputs and outputs. Whenever a transaction is conducted, a user takes one or several UTXOs to act as inputs. Then, the user provides their digital signature to verify the inputs’ ownership.
Once the transaction is processed, the input UTXOs are considered spent, which means that they can no longer be utilized. However, the transaction’s outputs become new UTXOs that can be used in future transactions.
For instance, if you have 1 BTC and need to pay someone 0.4 BTC, the transaction would split the currency you own into two outputs – the 0.4 BTC you spend, and the 0.6 BTC left. The 0.6 unspent bitcoins return to you as a UTXO you can use as input later.
All in all, The unspent transaction output (UTXO) model promotes cost-effectiveness and efficiency in crypto transactions. What’s more, it also acts as the protocol’s mechanism for keeping in check where the coins are at any given moment.
