Understanding UTXO (Unspent Transaction Output) In Layman's Term

Understanding UTXO (Unspent Transaction Output) In Layman's Term

By Eybyoung | Crypto learnings | 19 May 2021


Understanding how blockchain technology works are kinda complicated for a noob that is only beginning to explore the crypto world. I was wondering before upon seeing my read. cash wallet transactions with a huge amount of Bitcoin Cash recorded while the one I have is not the same as what I saw. But as a noob, I never bother to know the depth of it as I don't want any headache.

Just the other day, I read @Fexonice1 article that he already has 20 Bitcoin Cash for blogging at read. cash for almost 1 year. Then this thing came back to my thoughts and check my wallet transactions as well. I even commented on Fexonice's article that it is not accurate because what is recorded is not what I received.

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I decided to post it at the noise. cash, Lerkfrend, and Ashma answered me thoroughly. While Ashma suggested for me to understand better, I must DYOR about UTXO and I did. After what I learned, I have decided to write it down so other noobs will learn as well. As you can see in my read.cash wallet transactions, I already had 26.5 BCH since the beginning, but I think I only had 2-3BCH received.

What is UTXO?

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UTXO is an abbreviation of Unspent Transactions Output, it refers to a transaction output that can be used as input to a new transaction. UTXO's can be defined in each blockchain transaction from start and finish. Bitcoin and many other cryptocurrencies are using this fundamental element of the UTXO model.

Cryptocurrency transactions are made of inputs and outputs. When a transaction is rendered, a user takes one or more UTXOs that serve as an input(s). Then, the user will provide their digital signature to confirm its ownership over the inputs, which will finally result in outputs. When the UTXOs are finally consumed, they will be considered as “spent” and can no longer be used. While the outputs from the transaction will become a new UTXO which can be spent in making new transactions later.

Sounds Complicated? Let's give an example.

For example;

Eybyoung has 0.50 BCH in her wallet. The 0.50 BCH is not a fraction coin since she received it from the different tippers, it is rather a collection of UTXO. Let say, two UTXO which are worth 0.35BCH and 0.15 BCH outputs from past transactions. Eybyoung wants to tip Ruffa worth 0.30BCH.

Her only option is to break the 0.35BCH unit and send the 0.30BCH to Ruffa while 0.05 BCH back to herself.

Eybyoung created a transaction that appears in the network to be like this; Take my 0.35BCH as an input, break it up, give 0.30BCH to Ruffa's address and give back 0.05BCH to my address. The 0.35BCH is now a spent output and cannot be reused anymore. While two new UTXO's has been created the 0.30BCH and 0.05 BCH.

Eybyoung wallet transaction balance will now show 0.50BCH + 0.30BCH +0.05BCH including the past recorded transactions or the inputs amount of her tippers. Every transaction done in your wallet is recorded in the ledger, whether it is inputs and outputs. The incoming and outgoing transactions are recorded in the ledger like a “chain” which is why crypto runs in a block“chain”, a chain of transactions.

Layman's Example;

It is like when you pay something in cash, and you like to record it.

For example, you buy a shirt worth $25 and you only had a $100 bill. You will tender the $100 then you will receive $75 as exchange.

The record will be like this,

Wallet Cash- $100

Item price - $25

Tender - $100

Change - $75

On your next purchase, you will not tender the $100 because it was already spent. On your next purchase, your tender will vary depending on the amount of the item but not $100 anymore since you only had $75 left.

In blockchain you created a new UTXO which is the $25 and $75 but the $100 is still recorded because it cannot be deleted in the ledger as crypto has chained mechanism transactions but cannot be used anymore since it was spent already.

The more you used the wallet the higher the number of coins shown in your wallet because the incoming and outgoing transactions are recorded.

Reference: Binance Academy

Closing thoughts

I hope I give justice to this article and made you understand how cryptocurrency and blockchain work by using the UTXO fundamental element mechanism.

If I understand it wrong, you are free to correct me. Thank you for reading!

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Eybyoung
Eybyoung

#Club1BCH - BCH little enthusiasts!


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