Demystifying Bitcoin’s UTXO Model $BTC
Think of Bitcoin transactions like using gift cards. Imagine you have a $100 gift card for a store, and you buy items worth $60. You don't just spend the $60 and leave the remaining balance. Instead, the store gives you a new $40 gift card for the remaining balance.
This is similar to Bitcoin’s UTXO (Unspent Transaction Output) model. When you receive Bitcoin, it’s stored in your wallet as UTXOs. When you spend Bitcoin, the network uses your UTXOs as input to create the transaction. If the transaction amount is less than the UTXO, the remaining balance is returned to you as "change" in the form of a new UTXO. A small network fee is also deducted from the total.
For example, if you have a UTXO worth 0.5 BTC and want to send 0.3 BTC to someone, the network will use the 0.5 BTC, send 0.3 BTC to the recipient, and return 0.2 BTC as a new UTXO to your wallet, minus the transaction fee.
This does matter as the way you manage your UTXOs can affect transaction fees and processing speed. Too many small UTXOs can lead to higher transaction costs, as the network has to process more inputs. Consolidating smaller UTXOs into larger ones during times of low fees can make your future transactions more efficient.
Understanding Bitcoin’s UTXO model not only helps you optimize your transactions but also gives you a clearer picture of how Bitcoin operates under the hood.
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