What are UTXOs and how do they affect Bitcoin transactions and fees?

Among crypto's sea of acronyms, UTXO is one of the most significant. A fundamental component in Bitcoin transactions, UTXO — which stands for Unspent Transaction Output — helps to keep things running smoothly on the network. So, if you trade BTC, it's important to understand what UTXO is, how it works, and the benefits UTXO brings. We'll explain all in the following article.

TL;DR

• UTXOs act as digital change in Bitcoin transactions.

• More UTXOs in a transaction mean higher fees. This is because the network has to do more work to process them.

• Fewer UTXOs lead to smaller, simpler transactions and lower Bitcoin fees.

• Combining UTXOs during low-fee times cuts future costs and boosts transaction efficiency.

• Understanding UTXOs can optimize your spending and security in Bitcoin transactions.

What is UTXO

If you’re new to Bitcoin, you may have encountered the term UTXO. It’s one of those foundational concepts that's essential to the proper running of cryptocurrencies like Bitcoin. But why should you care and what does it mean?

Imagine you buy something at a store, and you pay in cash. If the item costs less than the money you hand over, the cashier returns the difference in change. When it comes to Bitcoin, the leftover change is similar to what we call a UTXO. It’s the unspent portion of the cryptocurrency after a transaction.

You can think of it as the “leftover” Bitcoin that’s now available for you to use in your next transaction. How does it work? Every time a transaction happens on the Bitcoin network, a new UTXO is created. It becomes a piece of unspent transaction output that you control with your private key.

When you spend some Bitcoin later, you’re using these UTXOs to cover the cost, just like using coins and bills from your wallet. Once a UTXO is spent, it can’t be used again — this prevents the network from double-spending and supports security.

Two unique feature of the UTXO model are that it offers transparency and security. Since each output must be accounted for, it makes tracking ownership on the Bitcoin blockchain reliable.

How does UTXO work in Bitcoin transactions?

Let’s explore a step-by-step guide to how the UTXO process works with a Bitcoin transaction.

A transaction is made

Whenever you send Bitcoin, the amount you send is broken into pieces called UTXOs. Think of UTXOs as the numerous digital “coins” that represent the amount of Bitcoin you control.

UTXOs get consumed

When making a transaction, some of your existing UTXOs are used to pay. Each UTXO is unique and can only be used once.

New UTXOs are created

After sending Bitcoin, any leftover balance becomes a new UTXO. It links to your wallet for future transactions.

Let’s look at an example. Imagine you have two UTXOs worth 0.5 BTC and 0.3 BTC. You want to send 0.6 BTC to someone. In this case, your 0.5 BTC and 0.3 BTC UTXOs are used to fund the 0.6 BTC transaction. The network consumes these UTXOs and generates two new outputs:

• 0.6 BTC goes to the recipient as part of the Bitcoin transaction.

• The remaining 0.2 BTC (after fees) is sent back to you as a new UTXO, ready to be spent later.

This process keeps the Bitcoin network secure and prevents double-spending, making sure each UTXO is used only once before being “spent” and replaced with a new one. Whether you’re sending or receiving, it’s the UTXO transaction model that’s quietly doing the heavy lifting in the background, keeping everything organized.

Why are UTXOs important for security?

When it comes to crypto security, UTXOs play a big part behind the scenes. But how does it keep your crypto safe? Let’s break it down.

Preventing double spending

Double spending poses a threat to digital assets, and without thorough checks, someone could try to spend the same Bitcoin twice. UTXO prevents this by making sure that each UTXO can only be spent once. Once it’s used in a transaction, it’s no longer valid, so there’s no chance of the same funds being spent again.

Maintaining transparency and accuracy

Every transaction on the Bitcoin network is public and verified by all participants. The UTXO security model plays a crucial part in this process by accurately recording who owns what. Once a UTXO is spent, the network updates its ledger to reflect the change in ownership, making sure that no one can claim those funds again.

Decentralization at its core

The Bitcoin blockchain is decentralized, meaning no single entity controls it. The UTXO model makes sure that all transactions are confirmed across the whole network. This means that it's almost impossible for anyone to change the transaction history. This decentralization is a major benefit of UTXOs for users looking for a secure and trustworthy system.

What's the difference between UTXO and account-based models?

UTXO is one of two models that keep track of your digital assets, the other being the account-based model. The two models form the backbone of how transactions work, but they operate differently. Let’s look now at the differences.

The UTXO model

• Used by cryptocurrencies like Bitcoin.

• Tracks individual “coins” or UTXOs (Unspent Transaction Outputs).

• Every time you make a transaction, you’re using specific UTXOs to spend your balance, and any change is returned to you as new UTXOs.

The account-based model

• Popular in blockchains like Ethereum.

• Works more like a bank account — your balance goes up and down with each transaction.

• There’s no need to worry about individual coins — the blockchain just updates your overall balance.

Many consider the account-based model to be the simpler model because the mechanics are familiar, being similar to how you check your bank account balance. You send or receive funds, and the total is adjusted automatically.

Key differences between the two models

• Granularity: The UTXO model tracks each output, while the account model keeps a balance. UTXO is like handling coins — the account model is like a running tab.

• Privacy: With UTXO, each transaction creates new outputs, making it harder to track spending. This provides a layer of privacy. The account model is simpler and easier for outside parties to follow.

• Scalability: The UTXO model is more scalable because it handles smaller pieces of information. The account model sometimes struggles with network congestion because it handles larger balances.

Although UTXOs offer more privacy and flexibility, managing them can be complex. Meanwhile, the account model is easier to understand and works well for applications like Ethereum, but it sacrifices a bit of that UTXO difference in privacy.

Which one's better? That depends on what you’re looking for. If you want simplicity, the account model might be your best choice. But if you’re after more control and privacy, UTXO has its advantages.

How do UTXOs affect Bitcoin’s transaction fees?

When you’re sending Bitcoin, one thing that might catch your attention is the transaction fee. Did you know that the number of UTXOs involved in your transaction plays a big role in how much you’ll pay in fees? Let’s dive into how this works and what you can do to keep your costs down.

More UTXOs, higher fees

Each UTXO is essentially one small part of the total amount you’re sending in a Bitcoin transaction. Combining multiple UTXOs for payment means more work for the network, leading to a higher Bitcoin fee. The more UTXOs used, the bigger the transaction becomes, requiring more computational power to process.

Imagine trying to pay for something with a huge pile of coins — it takes time to count them all. That’s similar to what the Bitcoin network has to do when you’re using multiple UTXOs in one transaction.

Smaller, simpler transactions cost less

If you have fewer UTXOs to deal with, your transaction is smaller and easier for the network to process. This means you’ll pay less in UTXO fees. So, it’s not just about the amount of Bitcoin you’re sending, but also how it’s being broken down into UTXOs.

Improving your fees with UTXO consolidation

One way to reduce your UTXO cost is by combining your UTXOs. This means combining multiple small UTXOs into a single, larger UTXO when the network fees are low. By doing this, your future transactions will require fewer UTXOs, leading to lower fees.

The final word

UTXOs are a fundamental feature of Bitcoin transactions and one that traders should be aware of. From preventing double-spending to impacting transaction fees, UTXOs are working behind the scenes every time you send or receive Bitcoin. Not only do UTXOs support the smooth running of transactions, they also impact fees and privacy for users of the network.

Interested in learning more about UTXOs? Check out or article on the role of UTXOs in inscription trading. And for more insight into the evolution of Bitcoin, take a look at our article on Fractal Bitcoin, which supports the network's scalability.