A Gentle Introduction to UTXOs
The blockchain universe can be divided into two main architectures for record-keeping of output transactions:
· UTXO-Based: Bitcoin, Bitcoin Cash, Litecoin, Dash….
· Account-Based: Ethereum, Ethereum Classic…
The simplest way to think about UTXOs is as the leftover cryptocurrency change in each transaction. UTXO was initially created as a key component of the solution of the famous double-spending problem. Every transaction creates a new UTXO and the age of the UTXO indicates the block that it was first included in. To some extent, the entire universe of blockchain transactions are just changes to the total UTXO set.
Let’s say today party A would like to transfer 1.5 BTC to party B. Party A has a wallet with UTXOs totaling 1 BTC, 0.75 BTC and 0.5 BTC respectively. The Bitcoin blockchain will assemble a transaction containing the 1.5 BTC and 0.5 BTC as inputs and generate a new UTXO totaling 0.25 BTC as output.
UTXOs as a Source of Intelligence
Beyond being a critical architecture of some of the main blockchains in the market, UTXOs are also a unique source of intelligence. For starters, UTXOs record the time of every transaction in a target cryptocurrency so it can be used as a key dataset to estimate holding/spending trends and other momentum indicators. In that context, UTXOs can be leading indicators of selling/buying pressure as well as help us understand unique characteristics of buyers and sellers.
Despite its richness of information, analyzing UTXO data is far from trivial. Most of the methods that can extrapolate meaningful intelligence about UTXOs requite periodical rescanning of the entire blockchain datasets. Similarly, tracing UTXO transactions overtime can be a computational nightmare.
UTXO Age Streams
If we look at the same chart just focusing on the new UTXOs we can see that the trends look closer to the price movements.
That pattern looks consistent even for crazy price movements. That can be seen in the recent analysis of Dash’s UTXOs.