How UTXOs Define Wallet Balance

Course Content
Summary Of Bitcoin
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Embarking on the Bitcoin Revolution – A New Era of Digital Currency
Welcome to an enlightening journey into the world of Bitcoin, the groundbreaking digital currency that has been redefining the global financial landscape since its inception in 2009. This introduction is your gateway to understanding the transformative power of Bitcoin.
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What is Bitcoin Mining?
Bitcoin mining is an essential process in the Bitcoin network. It involves validating transactions and adding them to the blockchain, the public ledger of all Bitcoin transactions. Here’s a comprehensive overview of Bitcoin mining:
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How Bitcoin Transactions Work
Bitcoin transactions are at the core of how the Bitcoin network functions. They enable the transfer of bitcoins from one user to another while maintaining the integrity and security of the network.
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Types of Wallets (Hot Wallets, Cold Wallets)
Wallets are essential tools for storing, managing, and transacting cryptocurrencies like Bitcoin. There are two primary types of wallets: hot wallets and cold wallets, each with its own characteristics and use cases. Here's everything you need to know about these wallet types:
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Bitcoin’s Monetary Policy
Bitcoin's monetary policy is a fundamental aspect of the cryptocurrency's design and governance. It governs how new bitcoins are created and how the overall supply of bitcoins is managed. Here's everything you need to know about Bitcoin's monetary policy:
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Bitcoin – The #1 Digital Revolution of Money
About Lesson

Unspent Transaction Outputs (UTXOs) play a crucial role in defining the balance of a cryptocurrency wallet, especially in blockchain systems like Bitcoin. Understanding how UTXOs work is key to comprehending wallet balances. Here’s everything you need to know about how UTXOs define wallet balances:

What is a UTXO?

  • A UTXO (Unspent Transaction Output) is a unit of cryptocurrency that has been received in a previous transaction and has not yet been spent. It represents the amount of cryptocurrency available for a wallet to use in future transactions.

UTXOs and Wallet Balances

  1. Initial UTXOs: When a user receives cryptocurrency (e.g., Bitcoin), it creates one or more UTXOs in their name. These UTXOs represent the cryptocurrency they own.

  2. Balance Calculation: The wallet’s balance is determined by adding up the values of all the UTXOs associated with that wallet’s addresses. In other words, the wallet balance is the sum of all unspent UTXOs that the wallet controls.

  3. Spending UTXOs: When the user initiates a transaction (e.g., sending cryptocurrency to someone else), the wallet selects specific UTXOs to use as inputs in the transaction. These UTXOs are consumed and spent in the transaction.

  4. Change UTXOs: If the total value of the selected UTXOs exceeds the amount being sent in the transaction and the transaction fee, the excess value is returned to the wallet as change. This change creates a new UTXO for the wallet.

  5. New UTXOs: When the user receives cryptocurrency in a transaction, new UTXOs are created in their name. These UTXOs contribute to the wallet’s balance.

Example

  • Suppose a user has three UTXOs: 1 BTC, 2 BTC, and 0.5 BTC. Their wallet balance is the sum of these UTXOs, which is 3.5 BTC. If the user wants to send 1.5 BTC to someone else, the wallet selects the 1 BTC and 0.5 BTC UTXOs as inputs for the transaction. Afterward, the wallet will have a new UTXO of 1 BTC (the change), and the recipient will have a UTXO of 1.5 BTC.

Importance of UTXOs

  • UTXOs are essential for preventing double-spending in the blockchain. Since each UTXO can only be spent once, it ensures that cryptocurrency cannot be duplicated or used in multiple transactions simultaneously.

Impact on Privacy

  • UTXOs also contribute to privacy in cryptocurrencies. The use of multiple UTXOs can make it challenging to trace the flow of funds, enhancing user privacy.

Wallet Balance Tracking

  • Wallet software keeps track of the UTXOs associated with a wallet’s addresses and calculates the total balance. Users can view their wallet balance within the wallet interface.

Wallet Balance Confirmation

  • It’s important to note that the wallet balance reflects the confirmed UTXOs on the blockchain. Transactions may need time to be confirmed by miners before the corresponding UTXOs are considered spendable.
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