UTXO: how Bitcoin tracks balances

The Bitcoin Accounting Model

UTXO stands for Unspent Transaction Output. Instead of tracking account balances like a bank, Bitcoin tracks individual chunks of value—each one the leftover of a previous transaction. Your wallet's balance is really the sum of every UTXO whose locking script you can unlock with your private key.

When you spend Bitcoin, you do not modify a balance—you consume one or more UTXOs entirely and create new ones. If you have a 1 BTC UTXO and want to send 0.3 BTC, the transaction destroys that UTXO and creates two new ones: 0.3 BTC for the recipient and roughly 0.7 BTC change back to you, minus the fee. This is why a single wallet often owns hundreds of UTXOs of varying sizes.

The UTXO model has clear advantages: transactions are easy to validate in parallel, double-spends are simple to detect, and privacy is somewhat improved because each UTXO can sit at its own address. The downside is operational complexity—wallets must intelligently choose which UTXOs to combine when constructing a transaction. Ethereum uses a different account-based model that feels more familiar but trades off some of these guarantees.