What are UTXOs and how do they work?

In the world of cryptocurrency, UTXOs are an important part of how transactions work. Here’s a look at what UTXOs are, how they work, and why they’re important.

What are UTXOs?

UTXO stands for Unspent Transaction (TX) Output. It’s the amount of leftover cryptocurrency change that you receive from each transaction.

How do UTXOs work?

When you look at your Cardano wallet, you see a balance. For this example, let’s set that at 100 ADA. Although you only see one balance, your funds are actually comprised of several UTXOs. You may have four UTXOs worth 25 ADA each, two UTXOs worth 50, or a set of UTXOs valuing 27, 28, 30, and 15 ADA. The specific amounts don’t matter, but they must add up to your total balance, in this case, 100.

For example, let’s say you want to send 25 ADA to your friend. For the sake of simplicity, we will use whole numbers and forget about network fees normally incurred by transactions. Now let’s assume that your underlying total amount of ADA in your wallet is actually composed of four separate UTxOs that add up to 100 ADA.

The transaction will need to send 27 ADA to your spouse from one of the UTXOs containing 27 ADA and it will also need to send 2 ADA back to your wallet as a “change address.” The process of figuring out which UTxOs to use in a transaction is called the Coin Selection Algorithm.