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What Is Written Here Is Not Investment Advice. It has been published on this page to explain the terminology used with explanations about the stock market, digital currencies, economy, finance and investment instruments.

🔍 Unspent Transaction Output (UTXO)

 What is Unspent Transaction Output (UTXO) in Cryptopara?

One of the terms frequently heard in the cryptocurrency world is Unspent Transaction Output (UTXO). So what is UTXO and how does it work? In this article, we will try to understand the concept of UTXO.

UTXO is a data structure used in blockchain-based cryptocurrencies. Outputs of a transaction are called UTXO if those outputs have not yet been spent. The UTXO model is used to ensure the security of blockchain-based cryptocurrencies and the traceability of transactions.

UTXO is essentially nothing more than locked cryptocurrencies. What a person owns is actually a bunch of UTXOs on the blockchain, with some cryptocurrency in it.

How Does UTXO Work?

UTXO works continuously in such a way that different outputs are produced for each transaction performed on blockchain networks. Every transaction on the blockchain must occur for a UTXO to be generated. If the transactions do not occur, the output cannot be produced.

Every transaction transfers value from input to output. There can be more than one input or output.

UTXO is the transaction outputs from a previous transaction and recorded in the database as input for the next transaction. Consumed UTXOs are marked as "spent" and cannot be used again. The outputs of the transaction are converted into new UTXOs, which can then be spent in the new transaction.

After the technical explanation, let's explain the Unspent Transaction Output (UTXO) phenomenon through an example transfer transaction:

In the first transfer transaction, which we gave an example above, Emre, who has 10 BTC in his wallet for investment purposes, sends 0.5 BTC to Ayşe. In the transfer transactions made due to the blockchain structure, the entire amount sent is processed as if it was spent in one go. In other words, although 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 is transferred to Emre's new address.

In the second transfer transaction, Ayşe's purchase of a house for 1.4 BTC is exemplified by using all the money in her wallet. In addition to 0.5 BTC from Emre, 0.8 BTC from Erhan and 0.1 BTC from Marie, all of Ayşe's money is combined during the transaction. The resulting 1.4 BTC of UTXO is transferred to the recipient of 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.

Why is UTXO Important?

The UTXO model is important to ensure the security and traceability of cryptocurrencies. UTXOs define where each blockchain transaction begins and ends. Thanks to the UTXO model, the path taken by the miner from the creation of the cryptocurrency to the end user's wallet can be determined.

The UTXO model is also used to prevent double spending attacks. A double spend attack means spending the same cryptocurrency multiple times. The UTXO model ensures that each transaction has a unique signature and that each UTXO is spent only once. This prevents the same UTXO from being used in multiple transactions.

The UTXO model also increases the fungibility of cryptocurrencies. Exchangeability means that one asset can be exchanged for another asset of equal value. For example, there is no difference between 1 BTC and another 1 BTC and they can be exchanged for equal value. The UTXO model makes it difficult to trace the origin and history of each cryptocurrency. This, in turn, maintains the tradability of cryptocurrencies.

UTXO model vs. Compute model

The UTXO model is a data structure used in Bitcoin and some other cryptocurrencies. However, not all cryptocurrencies use the UTXO model. For example, some cryptocurrencies like Ethereum use the account model.

The account model is a data structure that keeps the balance of each account and transactions transfer directly between the balances. The computational model is simpler and takes up less space than the UTXO model. However, the account model also has some disadvantages.

The account model may be less secure and less traceable than the UTXO model. In the account model, each transaction contains only the addresses of the sender and receiver. This may allow transactions to be more easily manipulated or reversed. Also, in the account model, it is easier to keep track of the history of each account. This can reduce the tradability of accounts.

In conclusion, there are advantages and disadvantages between the UTXO model and the computational model. Which model is better depends on the purpose and design of the cryptocurrency.


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