Understanding the UTXO Model

What is the UTXO Model?

Bitcoin doesn’t track “balances” like a traditional bank account. Instead, it tracks Unspent Transaction Outputs (UTXOs) — discrete chunks of bitcoin that can be spent in future transactions.

Think of UTXOs like physical coins or bills. When you receive bitcoin, you receive specific UTXOs. When you spend bitcoin, you consume entire UTXOs and create new ones as change.

Key Concepts

Inputs and Outputs

Every Bitcoin transaction has:

• Inputs: References to UTXOs being spent (consumed)
• Outputs: New UTXOs being created

Transaction
├── Inputs (UTXOs being spent)
│   └── Reference to previous tx output
└── Outputs (New UTXOs created)
    ├── Output 0: 0.5 BTC to recipient
    └── Output 1: 0.3 BTC change to sender

The UTXO Set

The UTXO set is the complete list of all unspent outputs on the Bitcoin network. This is what nodes track to validate transactions.

Metric	Typical Value
UTXO count	~80-100 million
UTXO set size	~4-6 GB
Average UTXO age	Varies widely

Spending Rules

To spend a UTXO, you must:

1. Reference it by transaction ID and output index
2. Provide a valid signature matching the UTXO’s spending conditions
3. Consume the entire UTXO (no partial spending)

For AI Agents

When interacting with Bitcoin as an agent:

Querying UTXOs

Use the mempool.space API to check UTXOs for an address:

curl https://mempool.space/api/address/{address}/utxo

Important Considerations

1. Privacy: Each UTXO is distinct and traceable
2. Fees: More UTXOs = larger transaction = higher fees
3. Consolidation: Combine small UTXOs during low-fee periods
4. Dust: Very small UTXOs may be uneconomical to spend

UTXO Selection

When building transactions, consider:

• Minimize number of inputs (reduce fees)
• Avoid creating dust outputs
• Consider privacy implications of UTXO linkage

Common Pitfalls

• Assuming account balances: Bitcoin has UTXOs, not balances
• Partial spending: You must spend entire UTXOs
• Ignoring dust: Very small UTXOs cost more to spend than they’re worth
• UTXO linkage: All inputs in a transaction are linked to the same owner

Summary

The UTXO model is fundamental to understanding Bitcoin:

1. Bitcoin tracks discrete outputs, not account balances
2. Transactions consume UTXOs entirely and create new ones
3. The UTXO set is the source of truth for spendable bitcoin
4. Understanding UTXOs is essential for fee optimization and privacy

Next Steps

Continue learning about Bitcoin:

• Address Formats — How UTXOs are locked to different address types (P2PKH, P2SH, P2WPKH, P2TR)
• Transaction Structure — Detailed anatomy of Bitcoin transactions
• BIP-32: HD Wallets — Managing multiple addresses efficiently with hierarchical deterministic wallets

See the Bitcoin learning index for all available guides.