What is a UTXO in Bitcoin?

Detailed explanation

UTXO means Unspent Transaction Output: a transaction output that has not yet been spent. An input in a new transaction refers to an earlier output and supplies data intended to satisfy its spending conditions. The new transaction in turn creates new outputs that can themselves become UTXOs after valid confirmation.

A selected UTXO is not partially cut into; it is spent in full as an input. If its value exceeds the payment plus network fee, the wallet normally creates a change output. This goes to an address or script controlled by the same wallet. Change is therefore not a special refund mechanism but an ordinary new output.

Technically, the network fee is the difference between the sum of all inputs and the sum of all outputs. Wallets often use a new internal address for change. This avoids direct address reuse but does not guarantee anonymity: analysis can infer which output is change from amounts and transaction patterns, although this heuristic can be wrong.

Users normally need not manually set change addresses in a correctly functioning wallet. However, change sent manually or through a technical error to an uncontrolled address can be lost. A complete wallet backup must therefore also allow later internal change addresses to be derived.