What is Unspent Transaction Output (UTXO)? How does it work?

Unspent Transaction Output (UTXO) term observed in many cryptocurrencies including Bitcoin (BTC); It means using the outputs of the transfers as input to the new transaction.

This technique, which has critical importance in the crypto money ecosystem and can be translated into Turkish as “Unspent Transaction Output”, also serves to determine the start and end point of transactions on the blockchain.

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Thanks to the UTXO model, the path followed by the miner from the creation of the crypto currency to the end user’s wallet can be determined.

Every transfer is the sum of inputs and outputs.

It may be more appropriate to explain the working logic of the system through the blockchain structure of the Bitcoin currency. When peer-to-peer (P2P) asset transfer is made without using the crypto money exchange, the entire amount remaining in the wallet account is marked as “spent” and the remaining money is forwarded to the new address of the sender.

Inputs and outputs to the wallet address turn into UTXO to form the source for further transactions.

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Consumed UTXOs are marked as “spent” and cannot be used again. The outputs of the transaction are transformed into new UTXOs, which can then be spent on the new process.

After the technical explanation, let’s explain the phenomenon of Unspent Transaction Output (UTXO) through the sample transfer process:

unspent transaction output - unspent transaction output

In the first transfer transaction we have given above, it is considered that Emre, who has 10 BTC in his wallet for investment purposes, sends 0.5 BTC to Ayşe. In transfer transactions made due to the blockchain structure, the entire amount sent is processed as if it was spent at one time.

In other words, even if Emre wants to send 0.5 BTC, all 10 BTC in his wallet are used. This amount is split into two UTXOs, 0.5 and 9.5. At the end of the transaction, 0.5 BTC is transferred to Ayşe and the remaining 9.5 BTC to Emre’s new address.

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In the second transfer transaction, Ayşe’s purchase of housing for 1.4 BTC using all the money in her wallet is exemplified. In addition to 0.5 BTC from Emre, 0.8 BTC from Erhan and 0.1 BTC from Marie, Ayşe’s all money is merged during the transaction. 1.4 BTC of UTXO is transferred to the recipient who will receive the payment.

BTCs from Emre, Erhan and Marie in Ayşe’s wallet are marked as “spent” at the end of the transaction and cannot be used again.

From miners to consumers …

Let’s take the second example we described above a step further and assume that the house price is 1.3 BTC. In this case, 0.1 BTC from Marie would not need to be used and would remain in Anne’s wallet.

If the house price was 1 BTC, this time, in addition to 0.5 BTC from Emre, 0.8 BTC from Erhan would be the input of the transaction. 1 BTC in the output section will be transferred as housing payment, and the remaining 0.3 BTC will be placed in a new address. 0.1 BTC from Marie would stay where it was. Thus, Ayşe would have a total of 0.4 BTC (0.3 BTC increased from housing purchase and 0.1 BTC not spent from Marie), standing at two different addresses.

After all, the UTXO system works as a tracking protocol to determine where cryptocurrencies are and where they come from. Since UTXOs cannot be partially spent, they are fully processed, split up and transferred to the business partners each time new ones are created.

DISCLAIMER: The statements contained here are not investment advice. Never trade without researching the markets thoroughly and without comments from different circles. Read the comments of the investors you trust and consult their opinions. Remember that every trading transaction involves risk. Make your own decision when taking any action. Cointelegraph cannot be considered directly or indirectly responsible for any damages or losses arising or allegedly arising from investment products or services.

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