What are Unspent Transaction Outputs (UTXO)?
An unspent transaction output is a process that is derived from cryptographic transactions on a blockchain whereby spent transaction outputs due to cryptographic transfers create new unspent transaction outputs that can be used in future transactions.
Key Takeaways
• Unspent transaction outputs are quite different from fiat money, especially when it comes to availability and government regulations.
• Bitcoin and other cryptocurrencies can be tracked and monitored thanks to the concept of unspent transaction outputs.
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Understanding Crypto Transaction Inputs and Outputs
Unspent transaction outputs generally are responsible for transactions carried out on the blockchain begin and ending. This crypto concept is important to Bitcoin transactions as well as those of other cryptocurrencies.
In every crypto transaction, there are inputs and outputs. When an investor decides to carry out a transaction, they select a given number of unspent transaction outputs to act as the inputs.
What then happens next is that the investor sets up a digital signature to show that they own the inputs, which are then converted to outputs.
Next, the unspent transaction outputs used are now categorized as having been spent and are no longer seen as unspent transaction outputs.
During this process, the newly spent transaction outputs go on to create new unspent transaction outputs that can be used in a future crypto transaction.
For better understanding, I would be giving an example below to explain in detail what unspent transaction outputs are.
An Example
Let’s say Henry has 0.45 BTC in his wallet; mind you, this is a combination of two unspent transaction outputs from former transactions made by Henry.
Assuming Henry needs to make a 0.3 BTC payment to Johnson, he would need to divide the 0.45 BTC units he has and transfer 0.3 BTC to Johnson, leaving him with 0.15 BTC.
Due to the transaction fees that would be charged, Henry ought to have less than 0.15 BTC, but let us keep that aside for simplicity.
Henry makes a transaction, giving a command to the network asking it to take his 0.45 BTC unspent transaction output as an input, split it and give 0.3 BTC to Johnson while returning 0.15 BTC to his wallet.
The 0.45 BTC has now been spent and cannot be reused or unspent. However, due to the transaction process that just took place, two more unspent transaction outputs have been generated, which are 0.3 BTC and 0.15 BTC.
In this example, Henry had to divide his unspent transaction output to achieve his aim, but he could have also just made use of an extra 0.05 BTC in addition to his 0.45 BTC to create an unspent transaction output worth 0.42 BTC while keeping 0.03 BTC in his wallet.
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Unspent Transaction Outputs Monitor Cryptocurrencies
In summary, unspent transaction outputs monitor the movement of cryptocurrencies from one address to another. They have some sort of similar objective to cheques in that they work with an individual’s wallet addresses.
Unspent transaction outputs operate in a cycle as they are produced from old transactions to be distributed and used in future transactions.
Unspent Transaction Outputs Vs. Fiat Money
1. A major point of contention in talks about the unspent transaction output concept is the distinction between unspent transaction outputs and fiat money.
The clear illustration is shown above, which demonstrates the workings of unspent transaction outputs, has shown that there is a significant difference between them and fiat money.
However, there are some loopholes when it comes to unspent transaction outputs, which are explained in detail below.
To begin with, the samples do not account for transaction costs. To execute a deal on a blockchain network, you must pay transaction fees.
2. Investors who transfer Bitcoin to a different wallet address will receive the new unspent transaction outputs, which are equal to the value of the original minus the amount of crypto that was transferred, including the transaction fees.
Fiat Monies and Unspent Transaction Outputs
The fixed value of fiat money is the next noteworthy flaw in comparison to unspent transaction outputs.
Fiat money is susceptible to government decisions on getting them printed and is also limited in supply as well. For each fiat money bill, there is a predetermined value.
However, the same cannot be said for unspent transaction outputs, as they are not limited in supply and vary greatly in number.
As a result, unspent transaction outputs have a significant advantage over fiat money in this regard.
Lastly, the most significant benefit of unspent transaction output is greater flexibility compared to fiat money.
Instead of the thousands of fiat currency required, you can have almost 1,000 bitcoins in a single unspent transaction output.
Final Thoughts
Unspent transaction outputs help keep track of cryptocurrencies on the crypto market. It is a concept that occurs in a cycle and begins again when new unspent transaction outputs are created.
You can read through this article to further understand more on how the concept of Unspent transaction output works.
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