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What is a UTXO?
Amanda avatar
Written by Amanda
Updated over a week ago

Imagine you have a physical wallet that contains a stack of coupons, each representing a specific discount or value. These coupons can be compared to UTXO coins within a network. Each coupon corresponds to a fixed amount and can only be redeemed in its entirety. Just as each coupon holds a distinct value, UTXO coins come in various denominations.

Receiving these coupons is analogous to receiving UTXO transactions. Just like each coupon has a unique value, UTXO coins also carry different values and are used as inputs in transactions. When you want to make a purchase using coupons, you must carefully select the right ones to cover the total cost. For instance, if your purchase totals $30, you might combine a $20 coupon with a $10 coupon, similar to aggregating UTXO coins to match a transaction's value.

However, it's important to note that bundling multiple coupons (UTXOs) into a single transaction can lead to additional costs. Imagine a scenario at a store offering a "buy one, get two free" deal. If you aim to use two coupons for six units of an item in one transaction, you might need to cover the cost of two units out of the six. This cost mirrors transaction fees in cryptocurrency, which increase when multiple bundled UTXOs are used, as more miners are required to secure and validate the transaction.

Similarly, once you redeem a coupon for a discount, it becomes spent and cannot be reused. This mirrors the concept of spending UTXO coins in a transaction, where they are marked as used. If your purchase results in change, you might receive new coupons (change) in addition to any unused ones. Alternatively, you could receive a store voucher equivalent to the remaining value not used in the transaction. In the realm of cryptocurrency transactions, spending a UTXO coin larger than the required amount leads to the creation of change in the form of a new UTXO coin.

Over time, your wallet may accumulate coupons of varying values, which you might bundle together in a single transaction for future use. However, this bundling concept comes with higher fees, mirroring the increased fees for utilizing multiple UTXOs in a single transaction. Similarly, in a cryptocurrency wallet, you could hold UTXO coins of different amounts. Just as you can't divide a single coupon into smaller units, you also can't split a UTXO coin. You must use the entire coupon for a purchase, just like the requirement to spend the complete UTXO coin in a transaction.

In summary, the UTXO model can be likened to managing and utilizing a collection of unique, unspent coupons for conducting transactions. Each coupon (UTXO) represents a specific value and necessitates thoughtful selection and usage in transactions.

For any additional questions, please view our other knowledge base articles or contact a support team member via the chat button. Examples are for illustrative purposes only.

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