An unspent transaction output (UTXO) is a Bitcoin transaction output that remains available for its owner to spend. Instead of storing account balances, Bitcoin tracks these spendable pockets of BTC like coins in a public bowl. section 12.2.1
A transaction changes the collection of available outputs in three steps:
- Consumes older UTXOs, making those coins unavailable. section 12.2.1
- Creates new outputs for payees, which become spendable UTXOs. section 12.2.1
- Returns excess value as change and reserves part as transaction fees when needed. section 12.2.1
Alice, Bob, and Felix
Alice spends a 5 BTC UTXO to send Bob 1 BTC, returning change to herself and reserving fees. Bob then combines two UTXOs to send Felix 2 BTC. section 12.2.1
Figure 12.2 Transaction 1 is signed by Alice and transfers 1 BTC to Bob. Because it uses a UTXO of 5 BTCs, the transaction needs to also send back the change to Alice as well as reserve some of that change as fees. Transaction 2 is signed by Bob and combines two UTXOs to transfer 2 BTCs to Felix. (Note that in reality, fees are much lower.)
Follow the transaction diagram to see UTXOs consumed, combined, and recreated as new outputs. section 12.2.1
