2.3 The UTXO Model (Bitcoin's 'Coin Jar')

Most people picture Bitcoin like a bank account with a single balance going up and down. It actually works more like a jar full of coins of many different sizes.

Each 'coin' in the jar is called a UTXO — an Unspent Transaction Output. When someone pays you, you receive one or more of these coins, each with its own specific amount, sitting at one of your addresses.

Here is the key rule: when you spend a UTXO, the whole coin is used up at once — you cannot chip a piece off it. If you owe someone 0.7 BTC and the smallest coin in your jar is worth 1 BTC, your wallet hands over the full 1 BTC coin, and the network mints a brand-new 0.3 BTC coin and sends it back to you as change. The original coin is fully consumed; the change is a brand-new UTXO.

Your displayed balance is just your wallet software adding up every coin in your jar. There's no central account anywhere — only a collection of unspent coins that your private keys can unlock.

This design has nice side effects: it's easy for computers to check many transactions at once, and you can use a fresh address for every coin, which is much more private than reusing one account number for everything.