Hello, curious little ones! 👋
If you are also interested in blockchain and Bitcoin, you must have heard of a somewhat "sophisticated" term: UTXO.
Doesn't it sound professional and mysterious? Don't worry! Today, I will be your "translator" and explain UTXO in the simplest way possible!
In your Bitcoin wallet, it isn't money, but... "shopping vouchers"?!
First, please forget the concept of "balance" in our traditional bank accounts.
Imagine you have a very special "digital wallet" that doesn't contain a string of numbers (like "you have 100 dollars"), but instead has independent, different denominations of "digital shopping vouchers"!
For example, your wallet might have:
A shopping voucher worth 0.1 Bitcoin
A shopping voucher worth 0.5 Bitcoin
A shopping voucher worth 1 Bitcoin
Yes, your "Bitcoin balance" is the total of these shopping vouchers!
What is the difference between using "shopping vouchers" and cash?
Now, let's buy something, like a little gadget worth 0.2 Bitcoin.
If paying with cash: you would take out a 0.5 Bitcoin bill and give it to the merchant, and the merchant gives you 0.3 Bitcoin in change. It's simple, right?
But using "shopping vouchers" is not that straightforward!
You cannot tear that 0.5 Bitcoin shopping voucher and only give the merchant 0.2 Bitcoin, while keeping 0.3 Bitcoin for yourself. No! Your "digital shopping vouchers" have some peculiar rules:
Must be spent "whole":
You must present the entire shopping voucher to the merchant.
Old vouchers "become invalid", new vouchers "are born":
When you give that 0.5 Bitcoin shopping voucher to the merchant, that voucher becomes "invalid" (because you have already spent it).
Change is a "new voucher":
After the merchant receives your 0.5 Bitcoin "old voucher", they will give you a brand new "change shopping voucher" worth 0.3 Bitcoin! This new voucher will be returned to your digital wallet.
Did you understand?
When you want to spend 0.2 Bitcoin, you take out an "old voucher" worth 0.5 Bitcoin (as input), and then the system creates a "new voucher" worth 0.3 Bitcoin (as change) back to your wallet, while giving the merchant a "new voucher" worth 0.2 Bitcoin (as payment).
So, what exactly is UTXO?
Answer revealed:
UTXO (Unspent Transaction Output), which in Chinese is called "未花费的交易输出".
In simple terms, it is the collection of **"all those digital shopping vouchers you haven't spent yet"** in your digital wallet!
Each shopping voucher is either "change" or "payment" from a transaction. They quietly sit in your wallet, waiting to be spent next time.
Why is it so complicated? Isn't it better to just show the balance?
You may be wondering, isn't this a bit too complicated? Wouldn't it be nicer to just show me how much Bitcoin I have?
In fact, the design of UTXO is the core of Bitcoin's cleverness and security! It has several very important functions:
1. Prevent "double spending"! In traditional bank accounts, your balance is just a number, and the bank needs to keep track of how much you've spent internally. But in the decentralized world of Bitcoin, how do we prevent you from spending the same money twice? UTXO is the answer! Each "shopping voucher" is unique, with a clear "birth certificate" (which transaction it came from) and a "lifecycle" (whether it has been spent). Once a UTXO is spent, it is marked as "spent" and cannot be reused. It's like how once you redeem a shopping voucher for a product, you cannot use it to buy something a second time.
2. Higher privacy: Each transaction may generate a new UTXO address (also a new "shopping voucher"), which makes your transaction flow harder to trace to some extent.
3. Flexible transaction combinations: When you want to pay a large amount of Bitcoin, you can choose to combine multiple smaller UTXOs (multiple "shopping vouchers") to make up the total.
To summarize:
Your Bitcoin wallet does not contain a pile of Bitcoin numbers.
It's more like a box filled with many **"digital shopping vouchers"**.
Every time you spend Bitcoin, you are consuming some old "shopping vouchers" while generating some new "shopping vouchers" (part goes to the recipient, part as change back to your own wallet).
And those "shopping vouchers" that haven't been spent yet are — UTXO!
I hope this metaphor of "shopping vouchers" helps you understand UTXO more clearly!
