What is a UTXO, and why does a Bitcoin wallet give you change?

No balances, just notes

Your wallet shows a balance, but that is not what Bitcoin stores. Wallets make it look as if bitcoin sits in a wallet, but it really moves from transaction to transaction.^1,3

Each transaction has inputs and outputs. Each input spends an output from an earlier transaction.¹ An output that hasn't been spent yet is called an unspent transaction output, or UTXO.¹

So when your wallet shows 10,000 sats, it means you have 10,000 sats waiting in one or more UTXOs.¹

Each note is spent once, in full

Each output can be used as an input only once. Using it again would be a double spend, which the network refuses.³

Inputs work like banknotes: they can't be partly spent.² If you pay for a $5 item with a $20 note, you get $15 back. Bitcoin works the same way. The transaction adds a second output that pays the leftover back to you. This is the change output.²

To the network, a change output looks like any other payment.² For privacy, wallets often send change to a brand-new address of yours.^2,1

The whitepaper planned for this. A normal transaction has one input, or several small ones joined together, and at most two outputs: one for the payment and one for the change.⁴

The fee is the gap

No line in a transaction says "fee". The fee is simply the difference between what goes in and what comes out.^2,4 The miner who adds the transaction to a block keeps that difference.³

This has a sharp edge. The full value of every UTXO you spend must go either to an output or to the miner as a fee.¹ So if a change output is left out by mistake, the miner keeps the whole leftover.¹

Choosing which notes to spend

Wallets choose which UTXOs to spend. This is called coin selection.² Unless the notes add up to roughly the payment plus the fee, there will be change.²

Spending lots of small UTXOs at once can cost more in fees, because the transaction gets bigger (Lesson 5 explains why size matters).⁵