The UTxO Model¶
UTxO vs Account model¶
Cardano uses the UTxO (Unspent Transaction Output) model, in contrast to the account-based model used by Ethereum. In the UTxO model, value is stored in discrete, indivisible outputs -- analogous to banknotes.
Key property
A UTxO can only be spent once, in its entirety. You cannot spend part of a UTxO -- you must consume the whole thing and return any excess as change.
Analogy with cash¶
| Cash | UTxO |
|---|---|
| Pay with a $20 note | Consume a UTxO as a transaction input |
| Receive change | Create a change output |
| Can't use the same note twice | A UTxO can only be spent once |
| Can't split a note in two shops | Must wait for change before spending it |
Consequences¶
Because each UTxO is indivisible:
-
Concurrency: having many UTxOs allows more transactions to be made in parallel. With only one large UTxO, you can only send one transaction at a time (and must wait for change).
-
Privacy: each time you spend from an address, that address and its spending key are exposed. Address reuse weakens privacy.
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Fragmentation: creating too many small UTxOs ("dust") makes future transactions more expensive, since more inputs are needed to reach the required amount.
Why coin selection matters¶
For every transaction, the wallet must decide which UTxOs to consume as inputs. This is the coin selection problem. A good algorithm must:
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Cover the required amount -- the total value of selected inputs must be at least the total value of all outputs plus the transaction fee.
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Respect transaction size limits -- the protocol limits the maximum transaction size, which in turn limits the number of inputs and outputs.
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Maintain a healthy UTxO set -- the selection strategy should ensure that the wallet's UTxO distribution evolves over time to remain useful for future transactions.
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Preserve privacy -- change outputs should not be easily distinguishable from payment outputs by an outside observer.
Multi-asset UTxOs¶
On Cardano, a single UTxO can carry ada (lovelace) and any number of native tokens. This makes coin selection significantly more complex than on Bitcoin, where each UTxO only carries a single asset.
The coin selection algorithm must satisfy requirements for all assets simultaneously -- it is not sufficient to handle each asset independently.
Minimum ada requirement
Every UTxO on Cardano must contain a minimum amount of ada, determined by the size of its token bundle. UTxOs carrying many different native tokens require more ada. The coin selection algorithm must account for this when generating change outputs.