The Bitcoin Network
IN THIS lesson we will review the UTXO model and how it works.
Understanding the Unspent Transaction Output (UTXO) Model in Bitcoin is extremely important, as it is meaningfully different from the Account-Based model of Ethereum Virtual Machine (EVM) and Solana networks. Below you will find a detailed explanation comparing the two of them, and some extra tips regarding UTXO management.
BTC UNSPENT transaction output (utxo) model vs evm/sol account-based model
The easiest way to think about how transactions in these blockchains work is to consider how you use a debit card vs cash.
EVM/SOL networks use the account-based model, basically a debit card, where you spend the exact amount you want to spend, which is then debited from your account.
BTC network uses the UTXO model, similar to cash transactions, where you overpay the amount you wish to spend (buying $5 candy with a $10 bill) and receive the change for your overspending ($5 in the candy example).
On Bitcoin, your wallet balance, more often than not, is in multiple different UTXOs. Let's say you have $1000 in a wallet, and that money came from 2 $500 withdrawals from Binance. You then have 2 UTXOs of $500, equivalent to the $1000 you see on your screen. With the UTXOs model, we also have inputs and outputs on every transaction that happens on the BTC Network. In the candy example above, we would have 1 input of $10, and 2 outputs of $5, one as the payment to the seller, and one as the change of the transaction for the buyer.
Important things to keep in mind about UTXOs:
A UTXO can only be used once. Let's say you withdrew 1 BTC to your Xverse from Binance, once that 1 BTC enters your wallet a new UTXO of 1 BTC is created, essentially crediting you that 1 BTC. Now you go buy an Ordinal/Rune for 0.1 BTC. Since you only have that UTXO worth 1 BTC, you are going to use that whole 1 BTC on that buy transaction and will receive 0.9 BTC back once the transaction is confirmed. However, BTC transactions are not instant, and while that transaction is pending you will not be able to purchase anything else, even though you technically have 0.9 BTC leftover. Once that purchase transaction is confirmed, you will receive the 0.9 BTC, which is the BTC that was not spent from that 1 BTC UTXO you used for payment.
Having multiple UTXOs of different sizes is ideal as you can then make multiple moves at the same time, however, too many small ones can be a bad thing, as it is much “harder” to spend 100 $1 bills than a single $100 bill. On BTC, the more inputs you have on a transaction, the higher the fee (bigger transaction size = bigger gas fee to be paid).
Runes function in the same UTXO model as BTC, which is why you need to split your Runes bag to sell percentages of it rather than your whole bag. Please always split your Runes, it is better for all of us!!
Below you can find a little example to show Inputs and Outputs on a Runes purchase on Magic Eden. The buyer used 2 UTXOs as the value of the purchase was bigger than what he had available on a single UTXO. You can find the breakdown of the inputs and outputs in the image.
