Understanding UTXO

What is UTXO?

UTXO (Unspent Transaction Output) is a fundamental concept in Bitcoin and many other blockchain networks. It represents the unspent outputs of previous transactions that can be used as inputs for new transactions. Essentially, a UTXO is like a physical cash bill—you can only spend it as a whole, and any leftover balance is returned as change in a new bill (UTXO). This model differs from Ethereum’s account-based model, where balances are updated directly. Unlike traditional bank accounts, where money is summed up into a single balance, Bitcoin transactions require selecting specific UTXOs for spending, similar to using exact change when making a purchase.

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How UTXO Increases and Decreases?

UTXOs increase when a Bitcoin transaction generates new outputs. For example, if Alice sends 0.5 BTC to Bob, a new UTXO worth 0.5 BTC is created in Bob’s wallet. If Alice had 1 BTC before the transaction, the remaining balance of 0.5 BTC minus any transaction fees is returned to her as a new UTXO.

Conversely, UTXOs decrease when they are used as inputs in transactions. When Bob later sends 0.2 BTC to Charlie, his 0.5 BTC UTXO is consumed, and two new UTXOs are created: one for Charlie (0.2 BTC) and one as change returned to Bob (0.3 BTC minus fees). This mechanism ensures that all Bitcoin transactions follow a clear and traceable path.

Any Bitcoin transaction, including sending BTC, minting or transferring inscriptions, Runes or BRC-20 tickers, may increase or decrease UTXOs.

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Unlocking UTXOs: Benefits and Risks

Many users inscribe inscriptions or mint Runes and BRC-20 tickers, resulting in small UTXOs that hold these assets containing only 546 sats. To prevent these asset-containing UTXOs from being spent as miner fees and leading to asset loss, Bitcoin wallets tend to lock them by default, making them unspendable. You may have some 'useless assets' in UTXOs like BRC-20 mint inscriptions, transfer inscriptions.

Benefits of Unlocking UTXOs:

Immediate Usability: Once unlocked, these UTXOs can be directly used as Bitcoin for transactions.User Control: UniSat wallet allows users to decide whether to unlock specific UTXOs. Before confirming a transaction, the wallet will display whether a UTXO contains a particular asset, enabling informed decision-making.

Risks of Unlocking UTXOs:

Potential Asset Loss: If an unlocked UTXO contains inscriptions, Runes or BRC-20 tickers you wanna hold, it will be spent as regular Bitcoin. This means that if such a UTXO is included in a transaction, the associated assets may be irreversibly sent to the recipient, leading to loss.

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Splitting and Merging UTXOs:

When to Use Them?

Splitting UTXOs involves breaking a large UTXO into smaller ones. This is useful in scenarios such as:

Enabling Multiple Transactions: Having smaller UTXOs allows users to initiate multiple transactions simultaneously. This is especially useful for minting inscriptions, Runes or BRC-20 tickers, where users may need to broadcast multiple minting transactions quickly without being stopped by pending(unconfirmed) UTXOs.

Preventing Asset Mixing: Users who manage both Bitcoin and Bitcoin ecosystem assets (inscriptions, Runes or BRC-20 tickers) may split UTXOs to keep asset-containing UTXOs separate from pure Bitcoin UTXOs.

Merging UTXOs is the opposite process, where multiple smaller UTXOs are combined into a single larger one. This is beneficial when:

Reducing Transaction Fees: Users who have accumulated many small UTXOs (e.g., 546 sats, 1000 sats) from minting inscriptions may find that transactions become costly due to the high number of inputs. Merging these UTXOs reduces the input count and lowers transaction fees.

Wallet Management: Consolidating UTXOs into fewer, larger UTXOs makes managing funds more efficient, especially for users frequently engaging with Bitcoin-based assets. You can merge many small UTXOs only containing 546 sats or 1000 sats into a larger one.