WHAT IS INPUT, OUTPUT & UTXO:
What is Input:
An input refers to the place where the crypto is coming from in a transaction. It’s basically like leftovers from previous transactions. So, when someone wants to transfer crypto, they pick the inputs they want to use, Each input says how much crypto is being sent and where it came from. Another important point is that You can’t just send half an input, For example, if Max only have one input of 4 bitcoin and wants to send 2btc to Mike, he can’t just send 2 or use half an input. He has to send 4btc and then get refunded 2btc back to his wallet.
What is output:
An output is like a destination label in a crypto transaction. When someone sends crypto, they choose where it goes by selecting one or more outputs. Each output declares how much crypto is being sent and where it’s going, with the address of the person who will receive it. Until an output is spent, it’s an unspent transaction output. Outputs are inputs of next transaction.
Change is like the leftover crypto that gets sent back to the person who sent it after they’ve already sent the right amount to the other person. Remember when we talked about Max wanting to send Mike 2 bitcoin but having 4 in a single input? He’d send 4 btc and get 2btc back as change. The change address is a new address that Max creates in his own wallet to receive the remaining 2 bitcoin.
When you make a crypto transaction, you have to include a fee to get it processed. So, when you’re setting it up, you say how much amount you want to send, who it’s going to, and how much the fee is. But you can’t send more funds than you have in your account, of course.
A signature is like a secret code that allows you to make the transaction. It’s made by using your own private key, which only you have. And again its like your password. It’s important because it makes sure no one can muddle with your transaction.
What is UTXO:
In simpler terms, a UTXO is an output from a transaction that has not yet been spent or used in any subsequent transactions. Unspent outputs occur when a transaction input is not fully spent the amount of cryptocurrency that a particular address or public key controls. When a transaction occurs on a blockchain, it creates one or more UTXOs as outputs. These UTXOs can then be used as inputs for subsequent transactions, and the process continues. Each UTXO is unique and is tied to a specific address or public key.
So when you send crypto, you’re using UTXOs from previous transactions to create new ones.
When you’re creating a transaction, you need to make sure that the inputs (what you’re sending) are more than the outputs (where you’re sending it). The difference between the two is the transaction fee that goes to the miners to validate the transaction.
The sender needs to have the private key that goes with the recipient’s public key to prove that they own the funds they’re sending. This is done using something called public-key cryptography, which uses a pair of keys – a public and a private key. The private key is like a password, and the public key is like an account number.
And of course, the sender needs to have enough crypto to send in the first place. If they don’t, the transaction will be rejected. The recipient needs to have the private key that matches the public key the sender provides, or they won’t be able to decrypt the message and get their funds.
You can actually send crypto from multiple inputs to multiple outputs in one transaction, which is pretty common. People use this to send crypto to lots of different people or to get change back from what they’re sending. All transactions in bitcoin have inputs and outputs, except for the first transaction in a block, which is called the Coinbase. The Coinbase transaction has no inputs, however, Only inputs of the Coinbase transaction include block reward for the miner. The Coinbase might also include a small fee for the miner, but usually it’s zero.
When you want to send cryptocurrency to someone, you need to prove that you actually own the funds you’re sending. This is done by creating a digital signature using your private key, which is associated with the public key of the recipient. Public-key cryptography is used to achieve this. Public-key cryptography involves using two keys – a public key and a private key. The public key is used to encrypt the data. The private key, on the other hand, is used to decrypt the data.
For the recipient to receive the cryptocurrency, they must have the private key that corresponds to the public key provided to sender. This is important because the recipient needs to be able to decrypt the message you send, and this can only be done using their private key. If the private key doesn’t match the public key, the decryption process won’t work.
Suppose Max has received two previous transactions, one for 2 BTC and another for 1 BTC, both of which are stored in separate UTXOs associated with his public key. Now Max wants to send 1.5 BTC to Mike, so he creates a new transaction with the following details:
Inputs: Max selects the two UTXOs as inputs, with a total value of 3 BTC.
Outputs: Max creates two outputs: one that sends 1.5 BTC to Mike’s public key/address, and another that sends 1.49 BTC (minus transaction fees that is 0.01) back to a new address that is generated by his wallet software as change.
Change: The 1.49 BTC that is not sent to Mike is considered as “change” and is sent back to Max in the form of a new output. Max’s wallet generates a new public key/address for this output, which he can use in future transactions.
Once Max creates the transaction, he signs it with his private key to prove that he is the owner of the UTXOs being spent in the transaction. he then broadcasts the transaction to the cryptocurrency network, where it is validated and added to the blockchain.
After the transaction is confirmed, Mike can access the 1.5 BTC that Max sent to him by using his private key to prove ownership of the public key/address associated with the output designated for him. Max can access the remaining 1.49 BTC by using his private key to prove ownership of the public key/address associated with the change output.
Hello, this is Zohaib.
I'm a certified cryptocurrency expert and professional banker with over 17 years of experience in trade finance and corporate banking. With a passion for technology evangelism and a drive to help people understand complex digital products, I have dedicated myself to providing clear and concise explanations of emerging financial technologies such as cryptocurrencies, blockchain, and other innovative financial products. Through this platform, I seek to share my knowledge and insights with others, helping them to navigate the rapidly evolving landscape of digital finance.