Homework on Bitcoin Transactions and UTXO - Questions

Blockchain and Bitcoin 101
#6209

  1. Describe what Unspent Transaction Outputs (UTXO) are.
    UTXOs are outputs of a transaction that have not been used as inputs for a new transaction. They are the amount you receive that is left to spend.

  2. What would happen if you don’t have any single UTXO that is large enough to cover for your transaction?
    You would need to use two or more UTXOs to cover the transaction and all those UTXOs need to be used. The leftover UTXO, after deducting the transaction amount and the fee from the input, should be sent to another wallet of the sender.

  3. How would a Bitcoin wallet specify the transaction fee when creating a transaction?
    The wallet could allow user-specified fees which are manually adjusted by the user. However, most wallets suggest a fee automatically based on previous transactions.

  4. How could you use the notion of transaction inputs and outputs to increase privacy in your transaction?
    For each transaction, one could generate a new address for receiving funds. This prevents keeping funds in a single address, making it harder to trace and link to a single entity.

#6210

  1. UTXO are unspent balances in your bitcoin wallet.

  2. If you don’t one single UTXO large enough to cover a TX, the wallet will add another UTXO to cover the difference, if available.

  3. The wallet searches for the best fee (or gives the user the option to select one of a few options), and assigns that fee to the transaction as an output.

  4. It is impossible to determine where the transactions are being sent, especially when multiple outputs are used, since addresses are encrypted.