What is Unspent Transaction Output (UTXO)?

UTXO or Unspent Transaction Output keeps track of the transactions and account balances in the Bitcoin blockchain. 

Understanding UTXO

An Unspent transaction output (UTXO) is the amount of cryptocurrency remaining after a successful cryptocurrency transaction. It is similar to receiving a change after purchasing in cash. UTXO represents a spendable amount of cryptocurrency that can be used for future transactions.

UTXO allows users to track ownership of cryptocurrency maintaining anonymity. That means users cannot be identified from their ownership until user reveal their address. UTXO model secures transparency through users’ addresses showcasing their transactions.

UTXO Model in Bitcoin

Bitcoin uses the UTXO model to track transactions using a system of input and output. Each bitcoin transaction has two parts- inputs and outputs. The input specifies the amount of bitcoin used for that transaction, in our example, the 10 dollars. Likewise, the output specifies the amount and address of the recipient.

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Benefits of the UTXO Model

• Enhanced privacy and security as UTXO does not need to keep accounts or balances instead it works independently.
• Reduce the risk of double spending in decentralized networks.
• UTXO consolidation reduces future fees. Consolidation is the process of combining multiple small UTXOs into fewer, larger ones in a single transaction. 

Limitations of the UTXO Model

• It requires users to consolidate frequently by paying transaction fees, which affects the user experience. 
• Difficult for users to understand and it takes too many resources which is inefficient.
• Less fungibility than other account keeping models.

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Conclusion

UTXO is an account-keeping model used in blockchain networks such as Bitcoin to secure users from double spending risks. This model allows for full traceability by promoting privacy and security. Unlike an account model as in Ethereum, which maintains an account state, UTXOs are moved and tracked throughout a blockchain network.