Chapter 1: The UTXO Model

In Satoshi’s Words

“We define an electronic coin as a chain of digital signatures. Each owner transfers the coin to the next by digitally signing a hash of the previous transaction and the public key of the next owner and adding these to the end of the coin. A payee can verify the signatures to verify the chain of ownership.”

— White paper, Section 2: Transactions (October 2008)

The Mental Model That Makes Everything Click

Forget bank accounts. Bitcoin doesn’t track balances. Instead, it tracks unspent transaction outputs (UTXOs) — think of them as individual coins sitting in lockboxes.

When you “have 1 BTC,” what you really have is a collection of UTXOs that add up to 1 BTC. Maybe it’s one UTXO worth exactly 1 BTC, or maybe it’s three UTXOs worth 0.5, 0.3, and 0.2 BTC.

UTXOs vs. Account Model

The UTXO Lifecycle

flowchart LR
    CB[Coinbase Tx<br/>Block N] -->|creates| U1[UTXO<br/>0.5 BTC]
    TX1[Some Tx] -->|creates| U2[UTXO<br/>0.1 BTC]
    U1 -->|spent by| TX2[Your Tx]
    U2 -->|spent by| TX2
    TX2 -->|creates| U3[UTXO<br/>0.3 BTC<br/>→ recipient]
    TX2 -->|creates| U4[UTXO<br/>0.2999 BTC<br/>→ change]
    TX2 -.->|0.0001 BTC fee| MINER[Miner]

    style U1 fill:#f96,stroke:#333
    style U2 fill:#f96,stroke:#333
    style U3 fill:#6f9,stroke:#333
    style U4 fill:#6f9,stroke:#333
    style MINER fill:#ff9,stroke:#333

UTXOs are created (green) by transactions and destroyed (orange) when spent. The difference between inputs and outputs is the miner fee. There is no “balance” — only unspent outputs.

Anatomy of a Transaction

Every Bitcoin transaction does exactly one thing: destroy old UTXOs and create new ones.

INPUTS (UTXOs being spent)          OUTPUTS (new UTXOs being created)
┌─────────────────────┐            ┌─────────────────────┐
│ UTXO: 0.5 BTC       │──────────►│ 0.3 BTC → recipient │
│ (from previous tx)   │           ├─────────────────────┤
├─────────────────────┤           │ 0.2999 BTC → me     │ ← change
│ UTXO: 0.1 BTC       │           │ (back to my address) │
│ (from previous tx)   │──────────►└─────────────────────┘
└─────────────────────┘
                                    Fee = 0.6 - 0.5999 = 0.0001 BTC

Key rules:

1. Inputs must reference existing, unspent outputs — you can’t spend what doesn’t exist or what’s already been spent
2. Entire UTXOs are consumed — you can’t partially spend a UTXO. If you have a 0.5 BTC UTXO and want to send 0.3, you spend the whole 0.5 and send 0.2 back to yourself as change
3. Sum of inputs ≥ sum of outputs — the difference is the miner fee (there’s no explicit fee field)
4. Each input must prove authorization — via a digital signature (covered in Chapter 2)

Change Outputs

Satoshi described this pattern directly in the white paper:

“Normally there will be either a single input from a larger previous transaction or multiple inputs combining smaller amounts, and at most two outputs: one for the payment, and one returning the change, if any, back to the sender.”

— White paper, Section 9: Combining and Splitting Value

Change is the most confusing part for newcomers. Here’s why it exists:

Imagine you have a $20 bill and want to buy a $12 item. You hand over the $20 (the full UTXO), get the item ($12 to the merchant), and receive $8 back (change to yourself). You can’t tear the $20 bill in half.

Bitcoin works identically. Every UTXO is an indivisible unit that must be fully consumed.

Common gotcha: If you forget to create a change output, the entire difference becomes the miner fee. People have accidentally paid hundreds of thousands of dollars in fees this way.

The Transaction Format (Simplified)

{
  "version": 2,
  "inputs": [
    {
      "txid": "abc123...",     // Which previous transaction?
      "vout": 0,               // Which output of that transaction?
      "scriptSig": "...",      // Proof you can spend it
      "sequence": 4294967293
    }
  ],
  "outputs": [
    {
      "value": 30000000,       // Amount in satoshis (0.3 BTC)
      "scriptPubKey": "..."    // Lock: who can spend this?
    },
    {
      "value": 29990000,       // Change (0.2999 BTC)
      "scriptPubKey": "..."    // Lock: back to me
    }
  ],
  "locktime": 0
}

Fields explained:

• version: Transaction format version (1 or 2). Version 2 enables BIP 68 relative timelocks
• inputs[].txid + vout: Points to a specific output of a previous transaction — this is the UTXO being spent
• inputs[].scriptSig: The “key” that unlocks the UTXO (your signature + public key)
• outputs[].value: Amount in satoshis (1 BTC = 100,000,000 satoshis)
• outputs[].scriptPubKey: The “lock” — a script that defines who can spend this new UTXO
• locktime: Earliest time/block this transaction can be included in a block (0 = immediately)

Fees

There is no fee field in a transaction. The fee is implicit:

fee = sum(input values) - sum(output values)

Miners collect the fee by including the transaction in their block. Higher fee = higher priority = faster confirmation. Fees are measured in satoshis per virtual byte (sat/vB), which we’ll explain in Chapter 3.

The UTXO Set

The UTXO set is the current state of Bitcoin — every unspent output that exists right now. As of 2025, it’s roughly:

• ~180 million UTXOs
• ~12 GB of data
• Stored on disk in LevelDB, with a configurable memory cache (default ~450 MB)

This is the only state a node needs to validate new transactions. You don’t need the full blockchain history to know if a transaction is valid — just the current UTXO set.

Coinbase Transactions

“The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.”

— White paper, Section 6: Incentive

Every block starts with a special transaction called the coinbase transaction. It has:

• No inputs (it creates new bitcoin from nothing)
• Outputs totaling the block subsidy + all fees from transactions in the block

As of 2024 (post-4th halving), the block subsidy is 3.125 BTC. The coinbase output can’t be spent until 100 blocks later (coinbase maturity rule).

The very first coinbase transaction (block 0, the genesis block) contains a famous message embedded by Satoshi:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

This served as both a timestamp proof (the block couldn’t have been mined before that date) and a political statement about why Bitcoin was created. The genesis block’s 50 BTC coinbase is permanently unspendable — a unique property of block 0.

Verify It Yourself

# Get a raw transaction
bitcoin-cli getrawtransaction <txid> 2

# Look at the UTXO set stats
bitcoin-cli gettxoutsetinfo

# Check if a specific output is unspent
bitcoin-cli gettxout <txid> <vout>

Key Takeaways

1. Bitcoin has no balances — only UTXOs
2. Transactions consume entire UTXOs and create new ones
3. Change goes back to you (if you remember to add the output)
4. Fees = inputs - outputs (implicit, no fee field)
5. The UTXO set is Bitcoin’s entire current state
6. Wallet software manages your UTXOs for you — see Chapter 9 for how HD wallets derive keys and track your UTXOs
7. Covenants (proposed in Chapter 12) would add the ability to restrict where UTXOs can be spent — a fundamental extension of the UTXO model

Next: Chapter 2 — The Script System — How those scriptPubKey locks actually work.