UTXO stands for Unspent Transaction Output. Let’s understand this with an example, Suppose Jane(14UwWGHekdseWyQiHNUukPzCxD36R7Bh9A) transferred 10 Bitcoins to Alice. In this transfer process, the output transaction to Alice(1ANFCGTSgVRiUjcp6V1sWdpZrSqtFomb4q) is called UTXO. So, UTXOs are just outputs.
Let’s assume that after receiving 10 Bitcoin, Alice’s updated balance is 496 Bitcoins which means Alice already had another UTXOs of 486 Bitcoins in her wallet that she might have received from others. When we combine all the UTXOs, it will give us the Total balance of a specific wallet address.
Miners keep track of the UTXOs in order to determine who owns how many bitcoins and who can spend them. This system enables Bitcoin to solve the Double Spending Problem.
The question remains, how did Jane get her Bitcoins in the First Place. That’s a great question, so let try to understand it.
How UTXOs are created?
UTXOs are created through the consumption of existing UTXOs. Every Bitcoin transaction is composed of inputs and outputs. Inputs consume an existing UTXO, while outputs create a new UTXO. So, if old UTXOs are destroyed to create new UTXOs, how are UTXOs created in the first place?
Every UTXO’s history can be traced back to one or more outputs of coinbase transactions. In Transacation id 23f1ebe4c92df964f4fdb8323c968e6b1c87a2a8e04ae8aa82e0d1e3a910b563, Jane(14U…..h9A) received 521 Bitcoins as a Change. In this transaction, ee09b64495bdf01f833421302c7faddc68720f2e01526e47c0bc189d0a04d94a was used as input to create new UTXO.
In Transacation id ee09b64495bdf01f833421302c7faddc68720f2e01526e47c0bc189d0a04d94a, Jane(14U…..h9A) received 529 Bitcoins as a Change. In this transaction, 6e8a661b17b0a62ac15e7c14e33afe24cfca206e18860dd29846c874420c14b9 was used as input to create new UTXO.
6e8a661b17b0a62ac15e7c14e33afe24cfca206e18860dd29846c874420c14b9(COINBASE) is the original transaction from all other transactions originated.
I hope you got an understanding of what is UTXO and how they are created. Comment below if you have any questions on this topic.