What is a Bitcoin unspent transaction output (UTXO)? 

Unspent transaction output (UTXO) is the technique the Bitcoin protocol uses to track balances as they move between crypto wallets.

When it comes to tracking and managing individual crypto balances, blockchain-based protocols typically use one of two different accounting models.

One is called the Account/Balance model. Projects like Ethereum, Tezos and EOS use this model to track balances as blockchain users execute transactions. The other is called the Unspent Transaction Output (UTXO) model. 

Bitcoin and many other cryptocurrencies such as Litecoin, Cardano and Dogecoin use the UTXO model. 

But what exactly is it, how does it work and what are the advantages of UTXO compared to the Account/Balance model?

History

Adam Back and the late Hal Finney were two members of the Cypherpunk cryptography group that bitcoin white paper author Satoshi Nakamoto frequented. The two are credited with developing the UTXO model independently between 1997 and 2004 respectively. 

When Bitcoin’s creator Satoshi Nakamoto launched the protocol in 2009, it became the first operational digital currency system to implement the UTXO model.

Both Hal Finney and Adam Back have long been suspected of being Satoshi Nakamoto, though it’s never been proven for certain.

UTXO at a glance

When you send bitcoin to someone, several steps programmatically take place. One of the earliest steps in the transaction process is for your cryptocurrency wallet to scan the blockchain for the amount of funds you have. These funds are known as unspent transaction outputs (UTXOs).

You can think of UTXOs as loose change leftover from previous bitcoin transactions.

The funds are considered “unspent” because they are freely available for you to send to someone or move to another wallet. They are called “transaction outputs” because they were created from previous transactions.

If you spend $12 on lunch using a $20 bill, you’d have a $8 bill leftover. In this example, the leftover $8 would be an unspent transaction output. It would go back in your wallet ready to be used to buy something else.

This is exactly how bitcoin UTXOs work. When you make a transaction, outputs from previous bitcoin transactions, i.e. your loose bitcoin change, are used as inputs for new transactions.

Another key comparison between physical cash transactions and UTXOs is that both have to be spent in full and cannot be subdivided. If you have a 5 bitcoin UTXO and want to send someone 1 BTC, you would have to send the entire UTXO worth 5 bitcoin and receive a new UTXO in return worth 4 BTC minus any fees. 

Just like in the example above where you hand over a whole $20 bill to pay for a $10 lunch.

When a UTXO is spent, it is considered “consumed” and is technically removed from circulation. 

Any change leftover is generated as an entirely new UTXO. This part of the UTXO system is how Bitcoin solves the double-spend problem. 

Just as you can’t physically give a shopkeeper a $5 bill and then give the same $5 bill to someone else, a bitcoin user cannot successfully use the same unspent transaction output in two separate digital transactions.

When a person attempts to spend the same UTXO twice, the two transactions end up in a mempool — a sort of waiting room for pending transactions. They remain in here until successful miners that win the proof-of-work competition bundle them into new blocks.

You can learn more about this process in our Kraken Learn Center article What is bitcoin mining?

Even if both transactions are bundled into two separate blocks and processed simultaneously, because of timestamping, one of the transactions would be verified ahead of the other. After a number of confirmations had passed (new blocks added to the blockchain) other nodes would flag the second invalid transaction and reject it.

Coinbase transactions

The only time a bitcoin transaction has no inputs is when newly minted BTC is created from mining.

Known as a coinbase transaction, this represents the first transaction in each new block.

Every satoshi (the sub-units of bitcoin) in circulation can be traced back using the transparent blockchain ledger to their respective coinbase transaction.

The main differences between the physical bills analogy and the UTXO model is that bitcoin and other UTXO-based cryptoassets aren’t bound by set amounts, i.e. $5, $10, $15, etc. Any amount of bitcoin (up to eight decimal places) can be an unspent transaction output. 

For instance, you may have 0.0003847 BTC leftover from a transaction.

This amount would become a new UTXO which must be spent in full if used and cannot be divided into smaller amounts.

Let’s say John has a crypto wallet balance of 1 bitcoin. His balance and the composition of that balance are two different things, much in the same way you might have $100 in your wallet but it could comprise four $20 bills, two $5 bills and one $10.

Let’s say the composition of John’s 1 BTC balance is made up of 5 different unspent transaction outputs.

• 0.138 BTC
• 0.1 BTC
• 0.004 BTC
• 0.73 BTC
• 0.028 BTC

John wants to send 0.6 BTC to Jane. To do this, John’s wallet software will automatically group together any number of UTXOs he controls to cover this transaction plus any miner fees involved to process it.

In this example, let’s say his wallet software automatically sends over John’s bitcoin UTXO worth 0.73 BTC to Jane and returns the leftover amount minus transaction fees to John as a new UTXO.

This amount is automatically sent to a change address; a separate address linked to your crypto wallet.

Bitcoin dust refers to UTXOs containing tiny trace amounts of satoshis leftover from previous transactions.

On their own, these miniscule amounts of BTC would cost more in transaction fees to process than they were worth and so they often sit in change addresses waiting to be bundled together with other UTXOs and spent.

What is a dusting attack?

Dusting attacks refer to scammers sending out dust to hundreds of thousands of different wallet addresses. The idea behind it is to ascertain potential targets for social engineering attacks.

A scammer will watch addresses containing the dust they’ve sent, waiting for the owner to make a transaction that bundles together UTXOs from different addresses linked to their wallet. Because dust UTXOs are so small, there’s a good chance they’ll be grouped together with others and used as inputs.

Once this happens, the scammer can get an idea of what funds a person has. They can then choose to embed phishing messages in transactions inviting the owner to click on a link that downloads malware, or visit fake websites that imitate legitimate landing pages and ask for personal information.

Now that you have learned all about the unspent transaction output model, are you ready to continue your crypto journey and buy bitcoin?

Check out our Kraken Learn Center guide for more information on How to buy Bitcoin (BTC) and sign up for an account with Kraken today.