Understanding Bitcoin UTXOs and the Transaction Process

When it comes to the mechanics of underlying blockchains like Bitcoin, two key concepts play a crucial role in creating and managing transactions:
UTXOS (Unspent Transaction Output) and
UTXO Sets. In this article, we will delve into the details of UTXOS and how it relates to transaction creation.

UTXOS: The Output of Transactions

In Bitcoin, each transaction is broken down into an output, which is a combination of funds sent to a specific address. These outputs are known as
UTXOs (Unspent Transaction Output). Each UTXO has two components:

• Input: The amount of cryptocurrency that was spent during the transaction.

• Output: A unique UTXO identifier that is used to track the balance and history of the output.

The total supply of UTXOs on the Bitcoin network can be thought of as a “backlog” of all possible outcomes that any future transaction could produce.

UTXO Sets: A Centralized Store

Now let’s discuss how UTXOS are added to the
UTXO Set

, which is essentially a central repository of all valid UTXOs on the Bitcoin network. In theory, a UTXO could be “added” to the set immediately after it is created or mined.

However, in practice, this is not quite the case. Here’s why:

Instant Addition

Actually, adding a new UTXO to the UTXO set requires additional steps beyond just creating or mining that transaction. Specifically:

• The
  transaction must be validated by multiple nodes in the network to ensure that it is valid and has not been altered since its initial broadcast.

• Once validated, the
  UTXO Set must update its records to reflect the new UTXO.

This process is called
hardening and ensures that only authorized transactions can add new UTXOs to the chain.

Unconfirmed Transaction Chain

Now you might be wondering where the input data comes from. Without a hard limit on the size of transactions, there is no inherent mechanism to generate an infinite number of transactions. Bitcoin’s weakness is due to its limited supply of 21 million coins, which must be mined by special computers called
miners.

When miners attempt to add new UTXOs to the chain, they must “sign” their transactions using their private keys. This process is irreversible and ensures that each transaction has a unique identity, even without knowing the final destination. Once a miner has signed the transactions of all parties involved in a given block, it transmits the block to the network.

To keep track of unconfirmed transactions, miners use a complex algorithm called a
Merkle tree, which creates a visual representation of all valid UTXOs in the chain.

Unconfirmed Transaction Chain: The Core Feature

The unconfirmed transaction chain is what makes the Bitcoin blockchain so unique and secure. This feature has several advantages:

• Immutable History: The Merkle tree allows us to create an immutable record of all transactions that have occurred on the network.

• Scalability: By creating multiple blocks at once, miners can process many transactions per second, making Bitcoin scalable for large user bases.

In summary, adding UTXOs to the UTXO pool requires additional steps beyond creation or mining. Instead, it relies on a series of verified transactions and a decentralized record-keeping system like the Merkle tree.

When building a blockchain from scratch, keep in mind that understanding these basic mechanics is essential to creating a secure, scalable, and feature-rich platform.

changing changing landscape