UTXO (Unspent Transaction Output)

Imagine Bitcoin as physical cash. If you have a $20 bill and want to pay $7, you hand over the whole $20 and get $13 back as change. Bitcoin works the same way: you select one or more UTXOs as inputs, send the desired amount to the recipient, and direct any remaining value to a 'change' address you control. The recipient's output and your change output are both new UTXOs.

Because the network verifies that every input is an unspent output that belongs to the spender, you cannot spend the same Bitcoin twice. The full set of valid UTXOs is maintained by every full node, which checks each new transaction against it.

The UTXO model enables Bitcoin's security and parallel transaction validation, but it also affects fees and privacy. A transaction with many small UTXO inputs is larger in bytes, so it costs more in fees. Wallets often try to consolidate small outputs to reduce future costs. Understanding UTXOs helps explain why sending the 'same amount' can sometimes cost different fees, and why managing outputs matters for privacy.

You receive three separate payments of 0.1 BTC, creating three UTXOs. To send 0.25 BTC, your wallet combines two of those UTXOs (0.1 + 0.1 = 0.2) plus the third (0.1) as inputs totaling 0.3 BTC, sends 0.25 to the recipient, and returns 0.05 (minus the fee) to your change address as a brand-new UTXO. The original three outputs are now 'spent' and cannot be reused.

It is common to imagine Bitcoin as a bank account with a running balance. In reality there is no single 'balance' field—the spendable amount is the sum of all UTXOs your keys control. When a wallet shows a balance, it is just adding up the unspent outputs it can sign for.