UTXO Model: Everything to Know
By Beluga Research August 1, 2023
- The UTXO model is a cryptocurrency transaction system where each output of a transaction becomes an input for future transactions
- UTXO stands for "Unspent Transaction Output" - a unique piece of cryptocurrency received in past transactions that has yet to be spent
- It is impossible to spend only a portion of a UTXO, just as traditional fiat coins and bills cannot be split
- UTXOs emphasize individual transaction outputs rather than account balances.
The UTXO model is a model for cryptocurrency transactions wherein a transaction is seen as the spending of previously-received funds. Each transaction output represents an unspent amount that can be an input in a later transaction. The UTXO model ensures that every transaction can be verified, as well as preventing double-spending, a common security concern in cryptocurrency ecosystems.
While the concept of UTXOs can be difficult to grasp at first, it may help to think of the UTXO model as similar to cash transactions, rather than the account model, which is similar to credit card transactions. In the former example, users must use entire UTXOs (the way that coins and bills are utilized) and may receive change in return. In the latter example, the exact amount of currency is added or subtracted from the user's balance.
A Brief History
The UTXO model originated in 2008 and was introduced by the individual or group named "Satoshi Nakamoto" at the same time as Bitcoin. The UTXO model is decentralized and trustless. It relies on cryptographic proof rather than centralized authorities like banks.
UTXO Model: Everything to Know
The UTXO model operates on the principle of inputs and outputs. Each transaction input references a specific UTXO from a previous transaction. Synonymously, each transaction output creates a new UTXO.
- UTXOs and Transaction Outputs - A UTXO is an unspent amount of cryptocurrency associated with a specific address. When a user receives funds, a new UTXO is created. This UTXO can later be an input in another transaction. Each UTXO has a corresponding value, script and locking condition that must be met to spend it.
- Transaction Inputs - A user engages in a new transaction by inputting a reference to UTXOs from previous transactions. A user spends a UTXO by including it as an input in the new transaction and providing proof of ownership through a digital signature. Users can combine UTXOs to cover the desired transaction amount, resulting in a transaction having multiple inputs.
- Transaction Outputs - Transaction outputs determine the distribution of funds in a transaction. Each output specifies the recipient's address and the amount of cryptocurrency they will receive. When a transaction is executed, the UTXOs used as inputs are consumed, then new UTXOs are created as outputs. Users can spend the new UTXOs in future transactions.
- Change Addresses - When the value of the UTXOs being spent exceeds the desired transaction amount, the excess is sent back to the sender. This occurs in the form of a "change output." This change is typically sent to a newly-generated address called a "change address." The use of a change address enhances privacy, making it harder to link transactions to a single user.
- Transaction Verification - The UTXO model ensures the integrity of transactions through a process called "transaction verification." Each transaction input must reference a valid UTXO, as well as provide the necessary cryptographic proof of ownership. The verification process involves confirming that the referenced UTXOs exist. Further, the process confirms that the UTXOs were not previously spent and that the provided signatures are valid.
- Unspent Transaction Outputs Set (UTXO Set) - The UTXO set represents the current state of unspent transaction outputs in a cryptocurrency network. It is a database that tracks all UTXOs available for spending. Nodes in the network maintain the UTXO set to validate transactions and prevent double-spending. As new transactions are added to the blockchain, the UTXO set is updated accordingly.
- The blockchain is composed of unspent transaction outputs. Each output represents a specific amount of cryptocurrency that has been generated or received by an address.
- Outputs act as the inputs for subsequent transactions . The outputs allow the transfer of ownership from one address to another.
- Each output is treated as a separate entity. An output is independent of any account or balance.
- Simplicity. Unlike traditional banking systems that employ account-based models, the UTXO model provides a straightforward, efficient method for managing digital asset ownership. By treating each output as an independent entity, the UTXO model eliminates the need for complex bookkeeping. It also ensures transparency in the transaction process.
- Privacy-enhancing properties. Since each output does not reveal the identity of the owner, it is a challenge to trace the flow of funds within the network. This has positive and negative implications. The cloaking of a user's identity increases fungibility. Users' transactions cannot be easily linked to their identities. However, this heightened privacy raises concerns regarding illicit activities and money laundering, as it is more difficult to track the origin of funds.
- Enables improved scalability and parallelism within a cryptocurrency network. Since each output is independent, multiple transactions can be processed concurrently. This allows for a higher throughput compared to account-based models. This parallel processing capability enhances the overall efficiency of the network and reduces transaction confirmation times.
- Facilitates the implementation of advanced transaction types. Advanced transaction types include multi-signature transactions and smart contracts. Multi-signature transactions require multiple signatures to authorize a transaction. They provide an additional layer of security and enable more complex ownership arrangements. Smart contracts are self-executing contracts with predefined conditions encoded into the blockchain. The UTXO model allows for the easy integration of these features, thereby expanding functionality and use cases for cryptocurrencies.
- Parallel Processing - UTXOs can be processed in parallel, allowing for faster transaction verification and increased throughput.
- Scalability - UTXOs provide a scalable solution as the blockchain grows. The verification of transactions can be easily distributed across multiple nodes.
- Lightweight - UTXOs are relatively lightweight compared to other transaction models. This reduces the storage requirements for nodes in the network.
- Address Separation - Each UTXO is associated with a specific address. This makes it difficult to link multiple transactions to a single user.
- Coin Mixing - Users can employ coin mixing techniques, such as "CoinJoin." This strategy further obfuscates transaction history and enhances privacy.
- Anonymity Set - UTXOs provide a high degree of anonymity, as the transaction history of each UTXO is not directly linked to the user's identity.
- Immutable Transactions - Once a UTXO is spent, it becomes immutable. This discourages tampering and the reversal of transactions.
- Protection Against Double-Spending - UTXOs prevent double-spending by enforcing the rule that each UTXO can only be spent once.
- Verification Simplicity - UTXOs simplify transaction verification by allowing nodes to independently verify the validity of each UTXO. There is no need to rely on the entire transaction history.
- Multi-Signature Transactions - UTXOs support multi-signature transactions. This provides increased security and control over funds.
- Smart Contract Support - Some cryptocurrencies built on the UTXO model, such as Bitcoin, have implemented smart contract functionality. This enables more complex transaction logic.
- Increased Storage Requirements - The UTXO model requires additional storage compared to other transaction models. Each UTXO must be stored individually, which can result in larger blockchain sizes and increased storage costs for network participants.
- Difficulty in Implementing Smart Contracts - Some cryptocurrencies built on the UTXO model have implemented smart contracts. There are challenges in implementing smart contracts when dealing with UTXOs. Smart contracts require maintaining and updating the state of each UTXO, and this process can be complex and require a great deal of resources.
- Reduced Fungibility - The UTXO model can lead to reduced fungibility. Certain UTXOs may become associated with illicit activities or be flagged by regulatory authorities, which can result in those UTXOs being treated differently. Later, users may suffer limitations on the acceptance and fungibility of these UTXOs.
- Lack of Granularity - UTXOs are indivisible, meaning that they cannot be split into smaller units. This lack of granularity can be restrictive when dealing with microtransactions. The inability to split UTXOs can also have negative consequences when a user requires precise control over the amount of cryptocurrency.
- Transaction Malleability - The UTXO model is susceptible to transaction malleability, which is the modification of a transaction identification without a change to its validity. Transaction malleability can pose problems when tracking transaction statuses and implementing certain types of off-chain protocols.