The term UTXO refers to the amount of digital currency someone has left remaining after executing a cryptocurrency transaction such as bitcoin. The letters stand for Unspent Transaction Output. Each bitcoin transaction begins with coins used to balance the ledger. UTXOs are processed continuously and are responsible for beginning and ending each transaction. Although confirmation of transaction results in the removal of spent coins from the UTXO database, a record of the spent coins still exists on the ledger.
UTXO or unspent transaction outputs are used in cryptocurrency transactions. These are the transactions that are left unspent after someone completes a transaction, similar to the change someone receives after conducting a cash transaction at the store.
A UTXO database is used to store change from cryptocurrency transactions. This database or ledger is initially set to empty or zero. As transactions multiply, the database becomes populated with change records from various transactions. When a transaction is completed and there are outputs that aren't spent, they are deposited back into a database as inputs which can be used at a later date for a new transaction.
What is a UTXO chain?
UTXO stands for "Unspent Transaction Output". A UTXO chain is simply a blockchain which uses the UTXO accounting method (such as the Bitcoin and Litecoin blockchains), as opposed to an account-based accounting method.
On the protocol layer of UTXO chains, there are no accounts or wallets. Instead, coins are stored as a list of UTXOs. The term "unspent transaction output" is a reference to the fact that a UTXO represents the output of a transaction received by a user, which that user can spend in the future (as it is still "unspent"). It is another way of referring to a balance of coins (e.g. BTC) controlled by a specific address.
Under this model, transactions are created by consuming existing UTXOs and producing new ones in their place. UTXOs can be divided or combined to reach the denomination required in a given transaction. This concept can be illustrated with an analogy to cash.
How do UTXOs work?
Each UTXO can be compared to a bill or coin. If you have $50 in cash, there are a number of different combinations you might have: