UTXO

UTXO stands for unspent transaction output.

An unspent transaction output (UTXO) is the amount of digital currency that remains after a cryptocurrency transaction. You can think of it as the change you receive after buying an item, but it is not a lower denomination of the currency—it is a transaction output in the database generated by the network to allow for non-exact change transactions.

The Bitcoin process involves a fee for the miners who are recording the transaction on the blockchain; that fee is proportional to the number of bytes the transaction occupies on the blockchain. Each UTXO requires a number of bytes, so the more UTXOs you have, the larger the transaction. Consequently, the larger the fee.

If a user has one Bitcoin stored in one UTXO, it will cost less to transact it than one Bitcoin spread across 10 UTXOs of 0.1 bitcoin or 100 UTXOs of 0.01 bitcoin. When you get to very small numbers of Bitcoin in a UTXO, the cost of recording the transaction on the blockchain will be greater than the value of the Bitcoin.

Such minuscule transactions, if initiated, are dropped, and need to be carried out again between the sender and receiver. This Bitcoin dust can remain in different wallets, making it a worthless holding until the mining fee comes down (or more bitcoins are added to the wallet to process a larger transaction).