In this post, we’ll unpack all you need to know about Unspent Transaction Outputs (UTXOs), defining exactly what they are, how they impact transaction fees, how to consolidate them and more.
What Are Unspent Transaction Outputs (UTXOs)?
Unspent Transaction Outputs (UTXOs) represents unspent chunks of digital currencies (such as bitcoin) leftover from transactions.
An Analogy
We can think of Unspent Transaction Outputs (UTXOs) like individual coins in a piggybank. Each coin represents one UTXO. The same way you combine individual coins in a piggybank to make a payment is the same way certain cryptocurrencies combine individual UTXOs to make a transaction.
Each chunk of digital coins you receive represents one UTXO. For example, if you receive 0.01 BTC from Transaction A and 0.02 BTC from Transaction B, you would have 2 UTXOs worth 0.03 BTC.
How UTXOs Impact Fees
Fees on the bitcoin network are determined by the number of inputs (the coins that are being sent) and the number of outputs (the coins that being received). Each UTXO needed to transact requires additional computing power which takes up more space on the blockchain.
Therefore, the more UTXOs you have to combine in a transaction, the higher the fee will be to process the transaction. In some cases, transaction fees can cost more than the value of an individual UTXO.
How To Consolidate UTXO’s
The process of consolidating UTXOs can optimise transaction fees by combining multiple small UTXOs and converting them into a single big UTXO. This process is akin to exchanging one hundred $1 bills for one $100 bill.
In order to consolidate UTXOs, simply send the maximum balance of bitcoin to an address that you own.
Summary (TL;DR)
Unspent Transaction Outputs (UTXOs) refers to unspent chunks of digital currencies leftover from transactions.
Each UTXO needed to transact requires additional computing power which takes up more space on the blockchain. Thus, the more UTXOs you have to combine, the higher the fee will be to process the transaction.
Consolidating UTXOs is as simple as sending the maximum balance of bitcoin to an address that you own.
