UTXO

A UTXO, which stands for ‘Unspent Transaction Output’, is that amount of cryptocurrency obtained by the recipient, or held by the sender, following a transaction on certain blockchains (such as Bitcoin’s); the amount of each UTXO can then be ‘spent’ on a new exchange. The balance of a crypto wallet is, therefore, the sum of all UTXOs not yet used.

Let us describe with an example how the UTXO model works: Anna has 1 Bitcoin in her wallet and wants to transfer 0.4 BTC to Beatrice; the transaction will not move the exact amount, but will have as input 1 BTC, which will then be divided into 0.4 Bitcoin to be sent to Beatrice and 0.6 to be returned to Anna. The separate outputs of 0.4 BTC and 0.6 BTC, thus generated, represent two UTXOs, which can be inputs for future transactions.

In this regard, the single BTC in the example consisted of only one UTXO, as it was the ‘whole’ result of past exchanges, so it had to be split; however, if Anna had already obtained a 0.4 BTC UTXO from previous transactions, she could send it directly to Beatrice. Conversely, if Anna wanted to send 1 ‘whole’ Bitcoin, but did not have a UTXO of that amount, she could use a 0.7 BTC UTXO and a 0.3 BTC UTXO, again obtained from previous transactions. The input UTXOs, in fact, can also be ‘summed’ to produce an output with a higher value.

The mechanism is therefore very similar to that of purchases in fiat currency, such as the Euro: UTXOs are equivalent to the change we receive when we pay for an object with an amount of money higher than its actual cost, because we do not have notes or coins of the right denomination. For example, we cannot ‘split’ a 10€ note to pay for an item costing 5€, so we will receive 5€ as change, which can be used for future purchases.

Returning to the crypto world, the sender signs each transaction with their private key, so as to ‘unlock’ the UTXOs they possess, also indicating the recipient’s wallet address or public key. This allows transactions to be traced: the UTXOs represent a ‘chain of ownership’, being the beginning and end of each transaction. The ‘history’ of a UTXO, in fact, allows it to be traced back to the miner who, in the first place, received it as a reward from mining.

In addition, each node in the blockchain network keeps an up-to-date register (set) of all UTXOs existing at a given time and their owners. Altogether, the set of UTXOs collects a number of coins equal to the total supply of that cryptocurrency.

In this way, nodes can check the validity of a transaction: they always check that the input quantity is equal to or greater than the sum of the outputs, thus preventing users from spending the same UTXOs twice, an illegal action called double spending.

The UTXO model, however, is not exploited by all blockchains: Ethereum, for instance, exploits the account model to manage wallet balances and transactions on the network.

Correlated words

Testnet

A blockchain network used for testing new applications and features in a secure environment.

Mining difficulty

Difficulty level of the cryptographic problems to be solved to mine a Bitcoin block.

Layer 2

Protocol that operates on the basis of a blockchain to improve network scalability and efficiency.

Account Model

On the Ethereum blockchain, accounts are the foundation of the decentralised ledger and they are usually associated with a wallet address.

Royalty

Financial compensation paid to the creator of an NFT following its secondary purchase.

Multisig Wallet

A multisig wallet is a type of crypto wallet that requires two or more private keys to perform transactions.

Custodial Wallet 

A type of crypto wallet in which third parties hold the owner's private keys.

Seed phrase

Sequence of 12 or 24 words used to retrieve access to a wallet.

Non custodial wallet

A crypto wallet in which the owner retains custody of the private keys.

Fan Token

Fan Tokens are utility tokens that allow sports teams to connect with their fans.

Minting

Minting is the process of registration and creation of new digital assets on the blockchain, like tokens of NFTs.

NFT Domains

An NFT domain is a decentralised Internet domain managed by smart contracts and registered on the blockchain.

Metaverse

Digital platform in which users take part in shared experiences, immersed in an online virtual environment, sometimes based on blockchain

Delegated Proof-of-Stake

A variant of Proof-of-Stake in which the stake is transferred to delegates who act as validators. 

Pure Proof-of-Stake

It is a type of Proof-of-Stake in which validators are chosen randomly and anonymously thanks to the VRF function.

Liquid Proof-of-Stake

Proof-of-Stake variant in which tokens are not staked but liquid.

Stake

Total amount of cryptocurrency being staked

Staking Pool

The joint staking of several people's cryptocurrencies with the aim to increase the rewards

Cold Staking

Type of staking that requires the use of a cold wallet

Blockchain

A technology based on cryptography that enables decentralised and uncensored execution of any type of transaction.

Proof-of-Stake

A consensus mechanism based on putting cryptocurrencies at stake in order to contribute to the blockchain.

Genesis Block

This is the first block of a blockchain, sometimes referred to as block 0.

Block Height

The number of blocks in a blockchain starting from the genesis block.

Network

The set of interconnected computers, called nodes, on which the blockchain of a given cryptocurrency is based.

Transactions per second (TPS)

Literally 'transactions per second', it is a measure of the speed of a blockchain.

Transaction

Exchange of value, property or data between two parties.

Shard

Fragments' of blockchain operating in parallel.

Proof-of-Work

A consensus mechanism for blockchain based on the computing power of mining.

Node

Device connected to a blockchain and participating in its network.

Off-chain

Transaction that is not performed on the blockchain.

On-chain

Any process executed or recorded on the blockchain

Mining Pool

A company that bases its business on mining, by collecting a large number of powerful mining devices.

Mining

The process of creating new blocks for a blockchain in exchange for cryptocurrency rewards.

Consensus Mechanism

A decentralised way to validate transactions on blockchain.

Hash

A cryptographic function that serves to identify each block of the blockchain.

Governance

In the cryptocurrency sector, it indicates the way and rules by which projects and blockchains are governed.

Fee

Commission paid for the execution of transactions.

Double Spending

The possibility for an attacker to spend the same amount twice if the payment system does not have a mechanism to prevent this.

DoS

A Denial of Service is a computer attack that aims to make a network or service inaccessible.

DLT

Distributed Ledger Technologies are technologies based on an immutable ledger of transactions, the control of which is distributed.

Decentralised

It is said of a system governed by the consensus of its participants and without a central authority or hierarchy.

Cold Wallet

Wallets that are not connected to the internet.

Bridge

In blockchain technology, it is a connection that allows interaction between different blockchains.

Financial Bubble

Increase in the value of an asset, in an excessive way, given its intrinsic value.

Blockchain Explorer

Software that allows users to view all transactions and data exchanged on a given blockchain.

Block

The set of encrypted transactions that, connected to other blocks, makes up a blockchain.

ASIC

Devices dedicated to mining certain cryptocurrencies.

Interoperability

The ability to exchange data with other platforms, including those based on different types of blockchain, as well as with the off-chain world.

51% Attack

When a node or group of nodes attempts to take control of the blockchain.

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