The UTXO model in blockchain: principles of operation, advantages, and limitations

What is UTXO?

The abbreviation UTXO stands for unspent transaction output. In short, UTXO represents a transaction and address accounting model in blockchain networks that allows tracking the movement of digital or crypto assets.

UTXO defines the amount of cryptocurrency available for spending at a specific wallet address. The same wallet can contain multiple UTXOs, and the sum of all unspent transaction outputs corresponds to the wallet balance.

Each UTXO contains the following set of data:

• The amount of cryptocurrency (balance);
• The public address to which the UTXO was received;
• Tx ID — a unique transaction identifier;
• The digital signature of the owner confirms ownership rights to the bitcoins. The signature is generated using the wallet's private key.

The first implementation of the UTXO accounting model was the Bitcoin blockchain. The idea behind UTXO was to create units of digital money that could be accumulated and spent.

In addition to Bitcoin, the UTXO accounting model is also used in other blockchains:

• Bitcoin Cash;
• Litecoin;
• Dogecoin;
• Zcash. This network uses so-called shielded UTXOs, which do not disclose the addresses of senders and recipients.

The Cardano blockchain also uses an extended model called EUTXO (Extended UTXO), which supports smart contracts and other programmable features.

How does UTXO work?

Unlike traditional accounting models such as Accounts* with balance-tracking mechanisms used in banking systems — and which underlie later blockchains like Ethereum, BNB Chain, and Solana — UTXO works with individual coins (digital assets) as physical objects.

* Accounts (account-based model) is a transaction accounting model in which each address or account in the system corresponds to a specific balance. When a transaction is made, the system checks whether the sender's account has sufficient funds, then decreases the sender's balance and increases the recipient's balance. Unlike the UTXO model, the account-based model does not operate on individual unspent outputs but stores the current state of accounts, which simplifies smart contract implementation but reduces the similarity to physical cash.

In the UTXO model, each transaction has inputs and outputs. An input represents the amount of cryptocurrency received by the recipient's wallet, or in other words, a reference to the production of a previous transaction. An output is a new destination for the coins, that is, the recipient's address.

Let's consider how the UTXO model works using an everyday example. Suppose Anna received 3 BTC from Dan and 2 BTC from Helen. In the blockchain, this is recorded as two separate unspent transaction outputs (UTXOs) linked to Anna's address. Although Anna's wallet shows a total balance of 5 BTC, in reality, it consists of two separate "coins."

Later, Anna decides to send 4 BTC to Nick. To do this, she creates a transaction that uses both UTXOs — 3 BTC and 2 BTC. These outputs are spent in full. In the new transaction, two outputs are made: 4 BTC are sent to Nick, and 1 BTC is returned to Anna as change to an address she controls. As a result, Anna's previous UTXOs cease to exist, and new ones appear instead: one for Nick and one for Anna. This is how bitcoin movement occurs in the UTXO model — not by changing balances, but by destroying old transaction outputs and creating new ones.

To make the UTXO principle easier to understand, it is enough to draw an analogy with cash. Just like banknotes, bitcoins cannot be "split" and partially spent. When a buyer purchases goods for $20 and hands the seller a $100 bill, they receive $80 back as change. The Bitcoin blockchain works according to the same principle.

Note: In advanced Bitcoin wallets such as Electrum, it is possible to configure UTXOs and use separate addresses for change. This approach makes tracking funds more difficult, thereby increasing the privacy of BTC transactions.

Advantages and disadvantages of UTXO

To spend a UTXO, a digital signature must be used, linked to a public key or address on the Bitcoin blockchain. This approach protects against double-spending — a situation in which the same coins are spent twice.

In the Bitcoin blockchain, each UTXO can be spent only once. As soon as a transaction output is paid, the UTXO becomes invalid and cannot be reused.

In addition, UTXO ensures transparency of the payment network. All Bitcoin transactions are public and can be verified by all network participants using blockchain explorers such as Blockchair or OKLink. Any user can track:

• How many bitcoins were received by a specific wallet address?
• How much was spent?
• How many coins remain unspent, that is, are held in the wallet balance?

The UTXO accounting model also guarantees that a decentralized group of miners confirms all transactions on the Bitcoin network, and that forging or altering the transaction history is practically impossible. Such a scenario is only possible in the case of a — 51% attack, which requires enormous resources due to Bitcoin's large market capitalization.

However, the UTXO accounting model also has its drawbacks. One of them is the accumulation of so-called "dust." The Bitcoin blockchain even has a specific type of dust attack, in which attackers send small amounts of satoshis (the smallest unit of bitcoin) to victims' addresses, thereby tagging them.

Accumulated "dust" cannot be spent from a wallet because it is below the minimum transaction amount. As a result, dust mixes with other UTXOs, which threatens the privacy of the targeted user.

This allows attackers later to track the route of bitcoins from the compromised address. Dust attacks do not allow attackers to steal cryptocurrency directly from victims, but they lay the groundwork for subsequent attacks.

In addition, UTXO creates issues related to data storage. The fact is that UTXO data is not deleted and continues to accumulate in the blockchain. While this ensures complete transparency and the ability to track all transactions on the blockchain, its size continues to grow over time. According to the Blockchair block explorer as of January 2026, just one copy of the Bitcoin blockchain, stored by every miner and full node, occupies more than 700 GB of storage. In total, there are more than 70,000 such nodes.

Another problem with UTXO is scalability. The UTXO model imposes several limitations on executing complex transactions (e.g., those using scripts) and on implementing various data types. This also imposes constraints on decentralized applications that process large volumes of data.

Finally, UTXO affects transaction fees. When sending a transaction on the Bitcoin blockchain, each UTXO must be signed separately. Accordingly, the more unspent outputs a transaction has, the higher the total fee will be. However, the Bitcoin blockchain allows the creation of multiple outputs. In other words, a user can send bitcoins to multiple addresses in a single transaction, thereby saving on transaction fees.