- UTXO is a term that many will have come across if they have spent any time learning about Bitcoin
- UTXOs are important in how Bitcoin functions, but not many people know what they are
- Let’s have a look at what a UTXO is and how it helps Bitcoin stay secure
Have you ever come across the term UTXO and wondered what on earth it means? Never fear, however, because FullyCrypto is here to fill you in on all you need to know about this term, what it means and why it plays such an important part in the Bitcoin ecosystem.
What is a UTXO?
UTXO stands for Unspent Transaction Output. Each Bitcoin transaction (where bitcoin is sent and received) has two parts: inputs and outputs. Inputs are like money in your wallet. When you want to send bitcoin to someone, you need to use some of the money from your wallet as an input for the transaction. These inputs are called UTXOs. They represent the unspent or unused bitcoin you have.
Outputs, on the other hand, are like the money you’re giving to someone. When you send bitcoin, you specify the amount you want to send and the recipient’s address. The transaction creates new outputs, which are UTXOs assigned to the recipient’s address, indicating that they now own that Bitcoin.
How Does it Work?
Here’s a simple example. Let’s say you have 2 BTC in your wallet, represented by a UTXO. When you want to send 1 BTC to your friend, you use the 2 BTC UTXO as an input for the transaction.
The transaction will consume that UTXO and create two new UTXOs: one with 1 BTC assigned to your friend’s address and another with the remaining 1 BTC, which acts as “change” and is sent back to your own address.
Why are UTXOs Important?
The UTXO model ensures that the bitcoin you spend in a transaction is valid and hasn’t been spent before. It also helps maintain the transaction history and allows anyone to verify the integrity of transactions.
By keeping track of UTXOs, the Bitcoin network ensures that people can only spend the Bitcoin they actually own.
