Ethereum: Why must UTXO be completely consumed? [duplicate]

The Endless Cycle of UTXO Consumption: Understanding Ethereum Mining Fees

As Bitcoin enthusiasts, we are no strangers to the intricacies of decentralized finance (DeFi) and the complexities of blockchain technology. One concept that often stirs up debate is the role of “UTXO” – unspent transaction outputs – on the Ethereum network. In this article, we will delve into the issue of UTXO consumption and why it is essential to consider it when designing decentralized applications (dApps) on the Ethereum blockchain.

A Simple Transaction

Let’s go back to a simplified example. Imagine Alice wants to send 1 BTC from her Bitcoin wallet (which contains a total of 10 BTC) to Bob. The transaction is recorded as follows:

• Alice spends 10 bitcoins

• Bob receives 1 bitcoin

• 1 bitcoin goes to the Ethereum network as a UTXO, which represents the transaction itself

• 8 bitcoins remain in Alice’s wallet

These “spent” bitcoins are then moved to a pool of other users’ wallets, where they can be used to fund future transactions. This process is repeated in each user’s wallet, with each block containing multiple transactions.

UTXO Cycle

Now let’s analyze the UTXO cycle:

• Alice spends 10 bitcoins, which are then moved to other users’ wallets.

• Each user in the pool has their own wallet, which contains UTXOs representing individual transactions (e.g. Bob receives 1 BTC, while Alice receives 0 BTC).

• The Ethereum network aggregates these UTXOs into a single block, with each block containing multiple transactions.

• The miner verifies the block and adds it to the blockchain.

As a result of this process:

• 8 bitcoins remain in Alice’s wallet

  

  , representing the initial transaction (10 – 1 = 9).

*3 new UTXOs have been added to Alice’s wallet to be used for future transactions.

• These new UTXOs represent individual transactions, such as Bob receiving 1 BTC.

In this cycle, each user in the pool receives a certain amount of UTXO (transactions) that they have not yet spent. UTXO consumption is necessary to maintain the decentralized nature of the network, ensuring that no single wallet has too much control or influence over the flow of funds.

Why do you need to be fully spent?

There are several reasons why Ethereum’s mining fee structure requires full UTXO consumption:

• Security: UTXOs provide a clear and transparent record of transactions. By consuming all UTXO in each block, miners ensure that the network remains secure and tamper-resistant.

• Network Decentralization

  : The decentralized nature of the network relies on the collective action of users in a group to verify transactions. Consuming all UTXO ensures that no single user controls the flow of funds.

• Funding New Block Rewards: In a typical proof-of-work (PoW) consensus algorithm, new blocks are rewarded with a certain number of coins. These rewards incentivize miners to verify and add transactions to each block. UTXO consumption is necessary to fund these rewards and maintain the integrity of the network.

• Reducing Transaction Fees: By consuming all UTXO in each block, miners can reduce the amount of “spent” bitcoins that need to be moved across different wallets, thereby reducing transaction fees.

Finally, the Ethereum network relies on UTXO consumption to ensure its security, decentralization, and integrity. While it may seem counterintuitive at first glance, the need for complete UTXO consumption is essential to maintaining the decentralized nature of the network and preventing a single user from gaining control of the blockchain.

value value generated explained