What are UTXOs?

Some blockchain applications use the UTXO model for transactions. Blockchain applications such as Bitcoin and MultiChain use this model. Even DLTs such as R3 Corda also use this model. Let's understand this model by understanding how Bitcoin transactions work.

In Bitcoin, a transactions is a collection of zero or more and outputs. These input and output objects are called Unspent Transaction Outputs (UTXO). Outputs of transactions are used as inputs of future transactions. A UTXO can be used as input only once. Each UTXO in Bitcoin contains a denomination and an owner (a Bitcoin address). In this model, the balances of addresses in the unconsumed UTXOs are stored. For a transaction to be valid, these requirements should be met:

1. The transaction must contain a valid signature for the owner of each UTXO that it consumes
2. The total denomination of the UTXOs consumed must be equal to or greater than the total denomination of the UTXOs that it produces

A user's balance is computed as the total sum of the denominations of UTXOs that they own. A transaction can consume zero or more UTXOs and produce zero or more UTXOs. For a miner to pay reward to itself, it includes a transaction in the block that consumes zero UTXOs but produces one UTXO with the denomination assigned the amount of Bitcoin it is supposed to award itself. 

A UTXO transaction model is suitable when blockchain transactions involve the transfer of asset, but for non-assets transfer transactions such as recording facts, invoking smart contracts, and so on, this model it not suitable.