Bitcoin tracks coins using something called UTXOs, which stands for Unspent Transaction Outputs. It sounds technical, but the idea is simple.
Every Bitcoin transaction has inputs and outputs that work like envelopes holding coins:
- Inputs are old envelopes of bitcoin you are opening to pay.
- Outputs are new envelopes the transaction creates that hold the amounts for the recipient and your change.
A UTXO is one of those outputs that has not been spent yet. It is like a labeled “coin” on the ledger with:
- A specific amount of Bitcoin
- A locking script (rules) that say who can spend it later
Your wallet’s balance is the sum of all the UTXO envelopes it can unlock.
Example:
- Someone sends you 0.5 bitcoin. That creates a new UTXO of 0.5 bitcoin that belongs to you.
- Later, you spend 0.3 bitcoin. Your wallet will use that 0.5 bitcoin UTXO as an input, then create:
- One output of 0.3 bitcoin to the receiver
- One “change” output of 0.2 bitcoin back to a new address you control
- One output of 0.3 bitcoin to the receiver
Now the original 0.5 bitcoin UTXO is spent. The envelope that held it does not exist anymore. There are two new UTXOs: one of 0.3 bitcoin and one of 0.2 bitcoin.
This UTXO model has several benefits:
- It makes verification simple, because a node only needs to check that the inputs are valid unspent outputs.
- It supports high parallelism and scaling.
- It gives fine grained control over coins, which helps with privacy and scripting.
You do not need to manage UTXOs manually. Your wallet does it for you, but understanding them gives you a clearer picture of how Bitcoin really works.