EMURGO Blockchain Primer: Cardano's UTXO Model - Simply Explained


In traditional banking systems, our personal bank accounts are kept up-to-date through a centralized system of accounts. This means that when you send or receive money for bills or your salary, the banking system keeps track of this through a centralized ledger of debits and credits. The bank records money that leaves one account, enters another and records the balance. This is an accounts-based model. Cardano - the first third-generation blockchain to evolve out of a scientific & peer-reviewed philosophy - uses a different type of system for keeping track of peoples’ funds and transactions known as the Unspent Transaction Output (UTXO) model.

This model was first applied to a blockchain with the dawn of first-generation Bitcoin and has been adopted by many blockchains since its inception. Cardano uses an upgraded version of this model to keep track of who owns what and transactions that are made from peer-to-peer in a decentralized ecosystem. In this post, we’ll look at what the UTXO model is, and its role in the Cardano ecosystem.

Cardano’s UTXO Model: A Big Apple Tree

To understand the UTXO model, it’s helpful to think of a very big apple tree with many branches. There are people all over the tree sitting on different branches, with different amounts of apples on each branch. On this apple tree, there is a branch with ten apples hanging from it. You are sitting on this branch of the tree, because you own these ten apples. Imagine now that you want to give four apples to a friend. To give these four apples, two new branches start to grow at the very end of the branch you were sitting on. One of these branches has six apples, and another branch has four apples. Your friend then sits on the new branch with four apples and you sit on the branch with six apples. The two new branches have a total of ten apples on them collectively, which is the same as the original branch you sat on. New branches start to grow from your branches in the same way whenever a transaction is made.

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