Unspent Transaction Output (UTXO)

In the realm of Bitcoin (BTC), the term Unspent Transaction Output (UTXO) is a crucial building block. It pertains to transaction outputs that haven't been used, readily available for future transactions as inputs. The significance of UTXOs becomes clearer in the context of Ordinals, a system that operates within UTXOs.

Bitcoin Transactions and UTXOs

To grasp UTXOs, you need to understand Bitcoin transactions first. A Bitcoin transaction moves value by taking one or more inputs (referencing UTXOs from previous transactions) and turning them into one or more outputs, which in turn create new UTXOs for future transactions.

UTXOs are akin to pieces of Bitcoin 'cash'. When you acquire Bitcoin, you're essentially receiving a collection of UTXOs. Your Bitcoin 'balance' is the aggregate value of these UTXOs.

Utilizing UTXOs

Sending Bitcoin involves your wallet picking out UTXOs as transaction inputs. These chosen UTXOs are 'spent' and hence cannot be used in future transactions.

In cases where the cumulative value of input UTXOs exceeds the amount you want to transfer, your transaction generates a 'change' output. This is a new UTXO returned to your wallet. For instance, if you aim to transfer 0.5 BTC to someone and use a 1 BTC UTXO as an input, the transaction produces two outputs: one sends 0.5 BTC to the recipient and the other sends 0.5 BTC back to your wallet as ‘change’.

The Importance of understanding UTXOs within the context of Ordinals

Ordinals are essentially inscriptions stored inside UTXOs. A single satoshi (sat) contains the Ordinal inscription, while the rest serve as padding (generally 10,000 sats which creates a buffer when transacting with the ordinal). Wallet users, particularly those of Sparrow, benefit from understanding UTXOs; To avoid inadvertently spending the UTXO holding their Ordinal in transactions, miner fees, or transfers,. Therefore it is imperative to apply UTXO Management, also known as ‘Coin Control’. Many individuals have unfortunately lost their Ordinals through spending the UTXO and thus this inattention to this detail.

However, for most users, wallets like Xverse and Unisat handle the management and mechanics of the UTXO containing your ordinal for you, eliminating the need to worry about this.