Key Takeaways
- Bitcoin uses UTXO for better security, preventing double-spending and ensuring each output is unique.
- UTXO improves scalability by allowing parallel transaction verification, unlike account-based models.
- Privacy is strengthened through UTXOs, which can be distributed across multiple addresses, making tracking difficult.
- The UTXO model has challenges, including complex wallet management and potential blockchain bloat.
Bitcoin’s transaction model is built around UTXO (Unspent Transaction Output), a distinct approach that differentiates it from account-based systems like Ethereum.
However, why did Bitcoin choose UTXO instead of an account balance model?
This article explores the reasons behind this design choice, its benefits and challenges, providing a comprehensive, up-to-date analysis in 2025.
What is UTXO?
A UTXO, or Unspent Transaction Output, is fundamental to Bitcoin’s transaction model. At its core, a UTXO is a piece of data representing a specific amount of Bitcoin that has not yet been spent. Think of it as a digital “token” on the blockchain until it is used in a transaction.
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Technically, a UTXO is an output of a transaction that can be used as input for a future transaction. When a transaction is created, new UTXOs are generated, and the ones used in the transaction are marked as spent.
How Bitcoin’s UTXO Model Works
Bitcoin’s UTXO model tracks individual outputs from previous transactions that have not yet been spent. Each UTXO is a discrete, indivisible unit of Bitcoin that can be used as an input for new transactions. Once paid, a UTXO is removed from the set, and new UTXOs are created as transaction outputs.
This model contrasts sharply with account-based systems, where balances are continuously updated for each account.
The image above illustrates Bitcoin’s UTXO model using Sarah’s transaction as an example.
Sarah spends 0.7 BTC—0.5 BTC goes to the seller, and the remaining 0.2 BTC is returned to Sarah as a new UTXO (unspent output). Unlike Bitcoin, Ethereum uses an account-based model. In that system, the same transaction would simply subtract 0.7 BTC from Sarah’s balance and add 0.5 BTC to the seller’s account—no new outputs are created, and no change needs to be managed.
Why Bitcoin Chose UTXO?
Bitcoin’s choice of UTXO is directly tied to its focus on :
- Security: UTXO prevents double-spending by making each transaction output unique. Once spent, it cannot be reused.
- Scalability: Each UTXO is independent, enabling parallel transaction validation, which will improve scalability.
- Privacy: UTXOs allow for better privacy since funds can be split across multiple addresses, making tracing difficult.
UTXO vs Account-Based Models: Key Differences
As discussed, Bitcoin and Ethereum, the two most well-known blockchain networks, use fundamentally different models for tracking balances.
- UTXO Model (Bitcoin): Bitcoin’s UTXO (Unspent Transaction Output) model tracks individual “chunks” of Bitcoin. Each UTXO is a separate, independent piece of Bitcoin received in a transaction. When a person spend Bitcoin, a person selects which UTXOs to use as inputs, and any unused value is returned as a new UTXO, similar to receiving change in cash.
- Account-Based Model (Ethereum): In contrast, Ethereum uses an account-based model similar to a traditional bank ledger. Here, each user has an account with a balance, and transactions directly update these account balances. This model is simpler because it tracks overall balances rather than individual transaction outputs. However, it has privacy limitations because transactions are directly linked to user accounts, making it easier to trace user behavior. It also lacks the same parallel processing advantage that UTXOs provide.
The table below highlights the main differences between Bitcoin’s UTXO model and Ethereum’s account-based model:
| Features | UTXO Model (Bitcoin) | Account-Based Model (Ethereum) |
| Balance management | Tracks unspent transaction outputs (UTXOs) | Manages overall account balances directly |
| Transaction processing | Verifies individual UTXOs in parallel | Updates account balances sequentially |
| Privacy | Supports address reuse and CoinJoin for obfuscation | Transactions are directly linked to user accounts |
| Scalability | Benefits from parallel validation of UTXOs | Limited by state updates of accounts |
| Double-spending control | Ensures unique UTXOs cannot be reused | Prevents double-spending via balance validation |
| State | The state is the list of UTXOs , which are consumed and created with each transaction. | The state is stored as a ledger of accounts and their balances, with each transaction directly modifying them. |
Understanding these differences is essential for grasping why Bitcoin chose the UTXO model, which enhances scalability and privacy while maintaining strong security.
How UTXOs Improve Privacy and Fungibility
Bitcoin’s UTXO model improves privacy by allowing users to manage funds across multiple addresses. Techniques like CoinJoin and Taproot further boost privacy. CoinJoin lets multiple users combine UTXOs in a single transaction, making it difficult to trace which inputs belong to which outputs. Taproot, on the other hand, makes complex transactions appear like standard ones, further obfuscating user behavior.
However, UTXO privacy can be compromised by address reuse. If a user repeatedly receives funds at the same address, analysts can trace all transactions linked to that address, revealing spending habits and connections. To maintain privacy, it’s best to use a new address for each transaction and leverage privacy-enhancing features like CoinJoin.
How Are Bitcoin Transaction Fees Determined?
Bitcoin transaction fees depend on the size of the transaction, specifically the number and data size of the UTXOs involved. More UTXOs mean larger transaction data, which leads to higher fees.
For example, using many small UTXOs to make a large payment increases the transaction size, similar to paying a bill with many small coins. Efficient UTXO management can help reduce transaction fees by consolidating UTXOs.
Challenges of the UTXO Model
Despite its benefits, UTXO has its challenges:
- Complex wallet management: Managing multiple UTXOs can complicate design, requiring efficient input selection.
- Blockchain bloat: The UTXO set can become large, increasing node resource requirements, but pruning and SegWit help mitigate this.
- Privacy limitations: While UTXO improves privacy, advanced analytics can still trace funds without CoinJoin or other privacy techniques.
Conclusion
Bitcoin uses the UTXO model for its security, scalability, and privacy benefits. While it presents unique challenges, including complex wallet management and privacy limitations, it remains foundational to Bitcoin’s decentralized, secure design.
Understanding UTXO helps users appreciate Bitcoin’s architecture and the trade-offs it makes.
FAQs
What is the meaning of UTXO in Trust Wallet?
In Trust Wallet, a UTXO (Unspent Transaction Output) represents a portion of your cryptocurrency balance that you have received but not yet spent. It is a digital record of funds you own.
Why use UTXO?
UTXO is used for enhanced security, scalability, and privacy. Each transaction output is independently verified, preventing double-spending and allowing for parallel transaction processing.
What is UTXOs in profit?
UTXOs in profit are unspent outputs that are worth more now than when they were received. For example, if a UTXO was received when Bitcoin was $10,000 and is now worth $30,000, it is considered “in profit.”
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