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Cryptocurrencies are uniquely designed to accomplish different functions. However, they also have several overlapping features. One such feature is their reliance on a common set of concepts: UTXO (Unspent Transaction Output). This article will outline what a UTXO is and how it functions in a cryptocurrency wallet.

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What is a UTXO?

UTXO stands for Unspent Transaction Output. This is what the wallet is used to track. In order to send, receive, and store cryptocurrency, each cryptocurrency wallet has to track and manage an amount of UTXO. The transaction amount is the sum of inputs and outputs. The inputs consist of the wallet’s own coins. The outputs come from other wallets.

How Does a UTXO Work?

Users perform transactions by creating an account of transactions. The wallet tracks the “used” condition of each transaction. In the used condition, the wallet can then create a new transaction. When the transaction is complete, the used condition is “unused.” In the UTXO model, there is no concept of “deposit” or “withdrawal.” What you have is the ability to create transactions from your wallet and the ability to receive payments into your wallet.

How Does a UTXO Work in a Cryptocurrency Wallet?

A cryptocurrency wallet is used to store and manage UTXO. The balance of coins in the wallet is used to perform transactions. The transaction process is as follows:

The wallet makes a new transaction.
This transaction sends the coins from the wallet.
The wallet records the “unused” condition of the amount it just sent.
This transaction enters the “unused” state.
The wallet has the option of creating new transactions.
These transactions are saved in the wallet and can be used in the future.

Conclusion

The UTXO model is straightforward. The only confusing thing about it is that people tend to associate it with Bitcoin when it does not pertain to Bitcoin at all. In fact, it applies to most cryptocurrencies and has been adapted to fit every single one of them.

The only thing holding it back from doing its full potential is the lack of adoption. Indeed, it is one of the most intuitive models of how a cryptocurrency works but there is still little use for it. If this turns out to be the case, then you can expect the best results from this model.