The UTXO Model in Bitcoin
UTXO (Unspent Transaction Output) serves as Bitcoin's fundamental accounting model, analogous to Ethereum's account system. Each input and output in a Bitcoin transaction represents a UTXO:
- Input UTXOs are previously unspent transaction outputs
- Output UTXOs become new spendable funds
- Coinbase transactions (mining rewards) are the exception, having no input UTXOs
A typical transaction flow:
- Mining reward creates the first UTXO (Alice's address)
- Alice sends funds to Bob - consumes Alice's UTXO and creates new UTXOs for Bob and Alice (change)
- Bob sends funds to Lily - similar process occurs
Addresses and UTXOs
Key characteristics:
- Users can create unlimited addresses
- Addresses can receive/send multiple transactions
- Each transaction creates new UTXOs tied to addresses
- Bitcoin never merges UTXOs automatically - each remains independently traceable
While wallet interfaces display combined balances, the blockchain maintains each UTXO separately.
Transaction Chain Reality
Contrary to initial perception:
- Not all transactions form a single chain
- Each block's coinbase transaction starts a new chain "head"
- Multiple transaction chains coexist in the network
As Satoshi noted in the whitepaper:
"We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner."
Bitcoin Address Security
Three critical properties:
- Irreversible derivation: Addresses come from public keys, but keys can't be extracted from addresses
- Public visibility: Anyone can verify address balances
- Private control: Only private key holders can spend funds
Transaction Anatomy
A transaction contains:
Inputs:
- Reference to previous UTXOs (transaction ID + output index)
- scriptSig (signature + public key)
Outputs:
- Amount in satoshis
- scriptPubKey (recipient address)
Ownership verification process:
- Confirm public key matches UTXO address
- Validate signature with public key
- Verify spend authorization
Key Takeaways
- UTXOs represent spendable funds, not account balances
- Wallet balances aggregate multiple UTXOs
- Each transaction consumes inputs and creates new outputs
- Address security relies on cryptographic proof, not secrecy
FAQ
Q: Can Bitcoin merge my UTXOs automatically?
A: No, Bitcoin never automatically merges UTXOs. Each remains separate in the blockchain.
Q: How many addresses should I use?
A: There's no limit. Many wallets generate new addresses for each transaction to enhance privacy.
Q: What happens if I lose my private key?
A: You permanently lose access to any UTXOs controlled by that key's addresses.
Q: Why does my wallet show a different balance than individual addresses?
A: Wallets sum balances across all your addresses, while the blockchain tracks each UTXO separately.
Q: How are mining rewards different from regular transactions?
A: Coinbase transactions have no inputs - they create new Bitcoin from the block reward.
Q: Can someone steal my Bitcoin if they know my address?
A: No, addresses are public information. Spending requires the corresponding private key.