UTXO (Unspent Transaction Output) is the accounting model used by Bitcoin and several other blockchains. In the UTXO model, your balance is not stored in a single account – instead, it is the sum of all unspent outputs from previous transactions sent to your addresses. Think of UTXOs as individual digital banknotes: when you receive Bitcoin, you receive a UTXO of a specific value. When you spend it, you must consume the entire UTXO as an input, create a new output for the recipient, and create a change output back to yourself for the remainder. Bitcoin has no concept of modifying a balance – only creating and consuming UTXOs. This model has advantages: UTXO transactions are easily parallelisable (non-conflicting UTXOs can be processed simultaneously), provide strong privacy (different UTXOs can come from different sources), and enable lightweight verification (SPV). Contrast with Ethereum account model (like a bank balance that is directly modified). The UTXO set – all unspent outputs currently in existence – represents all bitcoins in circulation and is what full Bitcoin nodes must track.
Example: Example: You receive 0.5 BTC (UTXO A) and 0.3 BTC (UTXO B) in separate transactions. To send 0.7 BTC, Bitcoin spends both UTXOs (total: 0.8 BTC) as inputs, creates one output of 0.7 BTC to recipient, and one change output of 0.099 BTC back to you (0.001 BTC goes to the miner as fee). UTXOs A and B are spent; two new UTXOs exist.
Learn more: Learn Me a Bitcoin – UTXO
