What Are UTXOs?
UTXO stands for Unspent Transaction Output. It is a fundamental concept in Cardano’s accounting model, which differs from traditional account-based blockchains like Ethereum. UTXOs represent units of cryptocurrency that remain unspent after a transaction and are used as inputs for new transactions.
Each transaction on Cardano consumes one or more UTXOs as inputs and generates new UTXOs as outputs, ensuring that every transaction is fully accounted for without altering existing records.
How Does the UTXO Model Work?
Cardano operates on an Extended UTXO (EUTXO) model, an improved version of Bitcoin’s UTXO model, enabling smart contract interactions. Here’s how it works:
Transactions consume UTXOs – When you send ADA, your wallet selects UTXOs to use as inputs.
New UTXOs are created – The transaction outputs generate new UTXOs for the recipient and any leftover change.
Change is returned to your wallet – If the total input is larger than the amount sent, the remainder is returned as a new UTXO.
Example of a UTXO Transaction
If Alice has two UTXOs of 5 ADA and 3 ADA in her wallet and wants to send 6 ADA to Bob:
Alice’s wallet selects both UTXOs (5 ADA + 3 ADA = 8 ADA total input).
Bob receives 6 ADA (new UTXO for Bob).
Alice gets 2 ADA back as change (new UTXO for Alice).
A small network fee is deducted.
Why Are UTXOs Important for Cardano Users?
1. Wallet Interactions and Balances
Unlike account-based models, a Cardano wallet’s balance is the sum of all UTXOs held by the wallet’s address.
Transactions must use entire UTXOs, meaning your wallet must manage multiple inputs and return change properly.
2. Smart Contracts and EUTXO
The Extended UTXO (EUTXO) model allows for smart contracts to function more securely and predictably by ensuring transaction validity before execution.
Each smart contract interaction consumes specific UTXOs, which prevents issues like “failed contract execution” common in account-based models.
3. Transaction Fees and UTXO Selection
The more UTXOs a transaction uses, the higher the network fee due to increased computational requirements.
Some wallets allow manual UTXO selection to optimize fees.
4. Potential Wallet Issues Due to UTXOs
Too Many Small UTXOs: Wallets with many small UTXOs may experience higher fees and slower transactions.
Inputs Exhausted Error: Some transactions fail if there are not enough valid UTXOs to cover the amount and fees.
How to Manage UTXOs in Your Wallet
Regularly Consolidate Small UTXOs – Sending ADA to yourself in a single transaction can combine multiple small UTXOs, improving efficiency.
Monitor Your Wallet’s UTXOs – Some advanced wallets allow you to manually select UTXOs for transactions.
Use Tools Like Unfrack.It – If transactions fail due to UTXO issues, tools like Unfrack.It can help optimize your wallet’s UTXO set.
