A brief explanation of Bitcoin transfers and balancing (UTXOs)
With discussion around Runes, Ordinals, and BRC-20, I’m noticing that quite a few folks are having a hard time grasping how even basic transfers work on #Bitcoin.
UTXO Explanation
Here is a brief article explaining how UTXOs are at the core of transfers and, in turn, Bitcoin balances.
Let’s go through a detailed flow explanation of the UTXO transaction with Alice and Bob, including the fee and miner reward.
- Alice’s UTXO: Alice has a 0.7 BTC UTXO in her wallet.
- Transaction creation: Alice creates a transaction to send 0.5 BTC to Bob. The transaction has an input of 0.7 BTC (the UTXO) and two outputs: 0.5 BTC to Bob’s address and 0.19999 BTC back to Alice as
change. - Transaction fee: Alice sets a fee of 0.00001 BTC to incentivize miners to include her transaction in a block. This fee is not part of the UTXO input from Alice’s side. Instead, it is an additional amount that Alice includes in the transaction.
- Transaction broadcast: Alice broadcasts the transaction to the Bitcoin network.
- Mining process: A miner collects transactions, including Alice’s transaction, to create a new block. The miner validates the transactions and solves a cryptographic puzzle to create a proof-of-work.
- Block creation: Once the miner successfully solves the puzzle, they create a new block containing the validated transactions and the proof-of-work. The new block is then broadcasted to the Bitcoin network for other nodes to validate and add to the blockchain.
- Miner reward: As a reward for creating the block, the miner receives newly minted bitcoins (currently 6.25 BTC) and the transaction fees from the transactions included in the block. In this example, the miner receives 0.00001 BTC as a fee for including Alice’s transaction in the block.
- UTXO update: The miner’s UTXO set is updated with the newly minted bitcoins and the transaction fees. The miner now has 6.25001 BTC in their UTXO set.
In this example, we can see the complete flow of UTXO from Alice’s wallet to the miner’s balance, including the transaction fee paid by Alice and the mining process that results in the creation of a new block and the update of the miner’s #UTXO set.
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