An unspent transaction output (UTXO) is the term for the amount of cryptocurrency that remains after a transaction was sent.
As an example, bitcoin stores data about transactions and user balances in the form of UTXOs, which are a list of “unspent” bitcoin amounts that have been sent to a user, but have not yet been sent from him/her.
This means only unused outputs can be used as inputs in a transaction.
After a transaction occurs, the input is deleted and a new UTXO is created, which can be used in future transactions.
Let's break it down:
If you want to purchase a meal that costs $18.75, but you only have a $20 note to spend, you will get back $1.25 and a receipt that confirms that.
This receipt or UTXO tells the total amount you have left to spend after the transaction. When you add up all your UTXOS and calculate the total amount of "change" you have received, this is equivalet to the total balance of the account.
In a way, we can think of each UTXO like a bitcoin note/bill, but it is not limited by denomination.
If you have $30 in cash, you must have more than one note as there is no such thing as a $30 note. You can have any combnation of notes that make up $30. UTXOs work the same way. When you see your total account balance, you have UTXOs that are different denominations that make up your total account balance.
So if we go to purchase a a new Trezor for $67, you most likely do not have a UTXO for exactly $67. Therefore, you will need to spend a combination of UTXOs becuase it is not possible to split the UTXOs. So if you spend $80 worth of UTXOs, you will get a new UTXO of $13 back as "change".
Why do UTXOs matter?
UTXOs protected by your Trezor hardware wallet are very important. When paying someone using your Trezor, you have the ability to control which "coins" (technically speaking the individual UTXOs) you are going to use, and if you require "change".
If you’ve spent bitcoin out of your Trezor wallet before and are wondering why you’ve never had to manually select UTXOs, this is because Trezor Suite makes things as simple and user-friendly as possible: it will automate UTXO selection for you in order to simplify the transaction process.
Coin control is an advanced feature that allows you to choose which UTXOs you want to spend in a transaction. Used properly, it can improve privacy, though we only recommend that you use it once you are familiar with the principles. You can learn more about coin control in the following video:
Manually selecting the UTXOs you use for each transaction can make a big difference in two main ways:
- Privacy: The UTXOs you select can determine the information you share with others (e.g., the recipient) about your wallet’s balance and transaction history.
- Transaction fees: The number of UTXOs you select can also affect the amount you’ll pay in transaction fees.
UTXOs are important when using Trezor and coinjoin because they improve the privacy and security of transactions on the blockchain. Trezor generates unique UTXOs for each transaction, making it harder for others to track where the funds came from.