UTXO Made Simple: Think of It Like Bills and Coins

The next time you see the word “UTXO” or someone asks you what it is, think about this 👇

Just like in your physical wallet you have bills and coins, when you decide to buy something you choose how to pay.

For example: if you have a €10 bill, five €2 coins, and a €100 bill, and you want to pay for something that costs €8, you decide which bills and coins (or combination of them) to use.

Bitcoin works in a very similar way.

UTXOs are like those “bills and coins”: they are the “unspent transaction outputs” (sounds technical 😅, but it simply means the pieces of Bitcoin you control with your private keys and haven’t spent yet).

When you make a payment:

– Your wallet usually selects which of those “bills and coins” (UTXOs) to use to cover the amount, unless you manually choose them.

– If the total is higher than what you’re paying, your wallet creates a new “bill or coin” (a new UTXO) as change for you and also creates one for the seller with the amount you’re paying.

So, after each transaction, some of your UTXOs are spent, and new ones are created, one for the seller (the payment you made) and, if needed, one as change for you.

It’s just like paying with cash: you hand over a big bill, the shopkeeper gives you change, and you end up with new bills and coins in your wallet. The bills and coins you didn’t use stay the same in your wallet.

I hope this helps you understand that UTXO is simply a technical way of saying the “bills and coins” you have in your Bitcoin wallet that you can spend whenever you want (technically, you never really have the bitcoins inside your wallet — but we’ll save that for another post 😉).

Note: For simplicity, this explanation ignores network fees and miners’ outputs.

✨ If you’re ready to experience it for yourself, check out the Bitcoin Vienna Tour — visit one of the stops and try paying with your own wallet using Bitcoin and Lightning ⚡.