- Bitcoin’s are unspent transaction outputs (UTXO)
- Each Bitcoin node remembers the UTXO set
Most people are generally aware of what the Bitcoin network is and what it does at this point. But, defining what a bitcoin itself actually is wades into deeper waters.
A Bitcoin is what is known as an unspent transaction output (UTXO). A UTXO represents coins or a fraction of a coin that have not been spent yet.
It can be thought of analogously to pocket change. Every node keeps track of how many UTXOs are in the “pocket” of a Bitcoin address. Each node continuously updates a snapshot of coins across addresses called the UTXO set in order to preserve the network’s integrity.
For example, if Alice is to pay Bob 3.5 BTC for a transaction with her 5 BTC, she spends one UTXO (her 5 BTC). Two outputs are created: the 3.5 BTC to Bob and the 1.5 BTC back to herself (plus a fee to miners we will ignore for the moment). Afterwards, the network’s nodes gossip Alice and Bob's input and output change into a new UTXO set.
When spent, a UTXO is signed by a private key to the public key of a recipient. Each signature and subsequent new UTXO creates a chain of signatures attesting to the validity of the prior transactions.
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