A transaction that is left unspent after being completed, similar to leftover change after making a purchase.
Bitcoin is the most famous example of cryptocurrency using this model.
Every bitcoin transaction has both an input and an output. The input is the address where the bitcoin is sent from, while the output is the address where it is sent to.
The user owns the output of a transaction and is able to spend later in another transaction. This is contrast with bank accounts, which register debits and credits and send a statement with a running balance to the account holder at the end of the month.
In the UTXO model, the total wealth or balance in a wallet is the sum of all unspent transaction outputs. It’s the cryptocurrency equivalent of getting change after making one or more purchases, which can be later used on further purchases.
For example, Bob has 10 coins and wants to send Alice two coins. Bob’s wallet first unlocks the 10-coin UTXOs and uses all the 10 coins as input to the transaction. This transaction sends two coins to Alice’s address, while the remaining eight coins are sent back to Bob as a new UTXO to a newly created address.
If Alice had three coins before the transaction, her wallet now keeps track of two UTXOs: one from before and the other from the transaction made by Bob.
In the UTXO model, the total inputs must equal or exceed the total outputs. This is one of the preliminary checks validators run to verify whether a transaction is valid.
UTXO thrives in a decentralized system because it can check for double spending in a computationally simple manner.