An Unspent Transaction Output (UTXO) is a discrete piece of bitcoin. Bitcoin does not use accounts and balances. Instead, individual pieces of bitcoin are owned by individuals. Each UTXO has an amount associated with it. These are the discrete units of bitcoin which are spent and received in every transaction.
When a UTXO is spent in a transaction it is destroyed, and one or more new UTXOs are created. All nodes maintain a set of existing UTXOs, called the UTXO set, which they update every time a block of transactions creates and destroys UTXOs. This allows nodes to independently verify whether a given transaction and the bitcoin it is attempting to spend are valid.
UTXOs are analogous to physical cash in that they usually require change when spent. If Alice owns a UTXO worth 1 BTC and wishes to pay Bob 0.4 BTC, she must spend the entire 1 BTC as an input. In order to send Bob exactly 0.4 BTC, Alice creates two outputs: the first to Bob, in the amount of 0.4 BTC, and the second back to herself, in the amount 0.59 BTC, assuming that she paid a 0.01 BTC transaction fee. This transaction will consume one UTXO and create 2 new ones. Note that the fee paid is not itself an output. It is implied by the sum of the inputs—1 BTC—minus the sum of the outputs—0.4 + 0.59 = 0.99 BTC. The miner of this transaction would calculate this fee and claim it for themself in the coinbase transaction.
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Unspent Transaction Output (UTXO): UTXOs are discrete pieces of Bitcoin, serving as the foundational units of ownership. Unlike traditional banking systems that rely on accounts and balances, Bitcoin operates on a UTXO model. Each UTXO is associated with a specific amount of Bitcoin. Notably, when a UTXO is spent in a transaction, it is effectively destroyed, and new UTXOs are created in the process. This dynamic system is essential for maintaining transparency and allowing nodes to independently verify the validity of transactions.
UTXO Set: The UTXO set represents the comprehensive collection of all existing UTXOs at a specific point in time. It serves as a vital component for calculating the precise current supply of Bitcoin. Nodes update their UTXO sets with each block of transactions, reflecting the ongoing changes in ownership and facilitating the verification of transaction validity.
Transaction: In the context of Bitcoin, a transaction is a record documenting the transfer of Bitcoin from one address to another. These transactions are recorded in blocks on the blockchain, forming an immutable and transparent ledger. Understanding transactions is fundamental to comprehending how Bitcoin is transferred and verifying the integrity of the entire blockchain.
Satoshi: The term "Satoshi" refers to the smallest unit of Bitcoin, named after the pseudonymous creator of Bitcoin, Satoshi Nakamoto. One Bitcoin is divisible into 100,000,000 satoshis. This divisibility is a crucial characteristic for Bitcoin as deflationary money, allowing for transactions with minute amounts and ensuring its scalability.
Coinbase Transaction: The coinbase transaction holds a unique position as the first transaction in each block. It is distinctive in that it mints new Bitcoin and aggregates the cumulative transaction fees, directing them to the miner responsible for validating and adding the block to the blockchain. Importantly, the coinbase transaction is the only transaction type that lacks inputs.
This comprehensive overview of UTXOs, the UTXO set, transactions, satoshis, and the coinbase transaction underscores the intricate mechanics of Bitcoin. My in-depth knowledge in this area allows me to articulate these concepts with precision, ensuring a nuanced understanding for those seeking clarity in the realm of blockchain technology and cryptocurrency.
