What is a UTXO?

A UTXO, short for unspent transaction output, is a specific amount of bitcoin that was sent to you and has not been spent yet. Bitcoin does not store a running balance for each user. Instead, your wallet adds up every UTXO it controls and shows the total as your balance.

What is a UTXO in Bitcoin?

Every Bitcoin transaction takes one or more existing outputs as inputs and creates new outputs. The Bitcoin Developer Guide describes each new output as waiting, unspent, until a later input spends it. A UTXO can only be spent once, and the guide notes that its full value must be either sent to outputs or left for the miner as a fee.

Think of UTXOs as banknotes. If you hold a 0.5 BTC output and want to pay 0.2 BTC, you cannot tear the note in half. Your wallet spends the whole 0.5 BTC, sends 0.2 BTC to the recipient, and returns the rest to itself as change, minus the fee. Bitcoin Core's examples show it sending that change to a new address from your wallet, which is one reason your Bitcoin address keeps changing. You can see inputs and outputs for any transaction on a blockchain explorer.

What is the difference between the UTXO and account model?

Bitcoin uses UTXOs. Ethereum uses accounts. Ethereum.org explains that each Ethereum account stores fields including a balance and a nonce, a counter that makes sure each transaction can only be executed once. Sending ETH simply lowers one balance and raises another, with no change output.

BitGo's developer guide compares the two. With UTXOs, your funds are discrete pieces with set amounts, much like cash. With accounts, the chain records one total per address, which suits smart contracts that need to read and update state. The UTXO approach means wallets must choose which pieces to spend, while the account approach requires careful ordering of transactions through the nonce.

What is UTXO consolidation?

Fees on Bitcoin depend on a transaction's size in bytes, not on how much value it moves, according to the Developer Guide. Every input adds data, so a payment built from fifty tiny UTXOs is bigger, and costs more, than one built from a single large UTXO.

Consolidation means sending many small UTXOs to yourself in one transaction so they merge into one larger output. Ledger's enterprise help centre describes this and suggests doing it when network fees are low, so future payments need fewer inputs. Ledger also notes that outputs below 546 satoshis are ignored, which matches the Developer Guide's "dust" threshold for common address types, the point at which an output is so small that spending it eats up a large share of its value.

There is a tradeoff. Combining UTXOs in one transaction links them together publicly, which can reveal that they belong to the same owner. The Developer Guide lists avoiding merges as one technique for privacy. For more on what is visible on chain, see can cryptocurrency be traced.