UTXO stands for Unspent Transaction Output and refers to the leftover cryptocurrency from a transaction that can be used as an input in a new transaction.
UTXO is a fundamental concept in blockchain technology, defining the accounting model for most cryptocurrencies. When a user initiates a transaction, the network creates UTXOs as the transaction outputs, each representing a specific amount of cryptocurrency. These UTXOs can then be used as inputs in future transactions, like spending coins.
A UTXO-based system allows for easy verification of transactions and helps maintain the integrity of the blockchain. When a user wants to spend their cryptocurrency, they must use one or more UTXOs as inputs, and the total value of the inputs must be equal to or greater than the amount they want to send. The difference between the total value of the inputs and the amount sent (transaction fee) becomes the UTXO for the recipient.
Let's illustrate how UTXO works in a simple example:
Example: Alice has 3 UTXOs in her wallet, one containing 0.5 BTC, another with 0.3 BTC, and the third with 0.1 BTC, making a total of 0.9 BTC. Now, she wants to send Bob 0.4 BTC. To do this, she uses the UTXOs as inputs for the new transaction, combining the 0.5 BTC and 0.3 BTC UTXOs (totaling 0.8 BTC) to fulfill the 0.4 BTC transaction and providing 0.4 BTC as the output to Bob's address.
The remaining 0.4 BTC (0.8 BTC - 0.4 BTC) becomes the UTXO for Alice, representing the change from her initial UTXOs after completing the transaction.