UTXO

UTXOs: The Building Blocks of Bitcoin Transactions

UTXOs are essentially the pieces of bitcoin that you own and can spend. When someone sends you bitcoin, what they are really doing is creating a UTXO that your wallet can spend in the future. Each UTXO represents a chunk of bitcoin that has been sent to a Bitcoin address that you control, and it remains unspent until you use it in a new transaction. When you spend a UTXO, it stops being unspent and becomes an input in a new transaction, creating new UTXOs for the recipients.

Transactions in Bitcoin are therefore a matter of using these UTXOs as inputs to create new UTXOs as outputs. The sum of your UTXOs represents your total bitcoin balance.

(@nonfungible_jan (Cofounder of Xverse) and @Dr_DAO (CTO of Taproot Wizards) have a great, in depth look at UTXOs here Technically Bitcoin: Episode 1 - UTXOs).

UTXOs and Wallets: Keeping Track of Your Ordinals

Since Bitcoin uses UTXOs, your wallet plays a crucial role. It doesn't store a single "balance" (as with an account based model like Ethereum) but rather tracks all the UTXOs you own. With Ordinals, your wallet needs to not only manage your UTXOs but also recognize and interact with the inscribed data attached to them.

Here's how UTXOs relate to Bitcoin ordinals:

1. Ordinal Inscription: An ordinal inscription is a process where additional data (like an image, text, or any digital artifact) is added to a specific Satoshi within a UTXO. This satoshi, identified by its ordinal number, carries this data as long as it exists unspent on the blockchain.

2. Transferring Ordinals: When you transfer an ordinal, you are essentially creating a transaction where the UTXO containing the inscribed Satoshi is spent, and a new UTXO is created that inherits the ordinal number (and its inscription). This means the unique property of the Satoshi is preserved and transferred to a new owner.

3. Ownership and Uniqueness: Through UTXOs, ordinals maintain their uniqueness and ownership. Since each UTXO can be tracked on the blockchain, the specific Satoshi carrying an inscription can be uniquely owned and transferred, just like traditional bitcoin transactions.

4. UTXO Management: For users interested in ordinals, managing UTXOs becomes more nuanced. Users may want to ensure that transactions do not accidentally combine or split UTXOs in a way that disrupts the intended ordinal inscriptions.

In summary, the concept of UTXOs in Bitcoin provides the foundational mechanism for the creation, transfer, and ownership of Bitcoin ordinals. By utilizing the inherent features of UTXOs, ordinals can assign and maintain unique properties to individual Satoshis, expanding the utility and functionality of the Bitcoin blockchain beyond simple value transfer.