The eUTXO Model
Understanding the Extended Unspent Transaction Output (eUTXO) model of Cardano.
The Accounting Approach of Blockchains
To keep track of who owns how many coins, blockchains use different systems. Ethereum uses an Account Model, which works similarly to a traditional bank account: there is a global address book where each address is associated with a specific balance. This is intuitive, but often leads to unpredictable errors and high parallel conflicts with smart contracts.
Bitcoin, on the other hand, uses the UTXO Model (Unspent Transaction Output). Here, there are no accounts, only 'banknotes' (outputs). You have a collection of these banknotes in your wallet, and when making a transfer, you cryptographically combine and slice up these notes into new ones.
eUTXO: The Evolution
Cardano combines the mathematical security of the Bitcoin UTXO model with the expressiveness of Ethereum's smart contracts and calls this Extended UTXO (eUTXO).
How does it work?
A transaction takes one or more unspent outputs (UTXOs), consumes them completely, and creates new outputs. The most important aspect of eUTXO on Cardano is Determinism. But what does that mean?
Local Determinism
In Ethereum, smart contracts can produce unpredictable results due to global state changes. A transaction might suddenly fail but still cost extremely high gas fees. With Cardano's eUTXO, the output of a transaction is already calculated locally in the wallet before sending. If the transaction is created validly, it is mathematically guaranteed that it will be accepted on the blockchain exactly as such (unless the UTXOs have been consumed elsewhere in the meantime).
Advantages of eUTXO
- Parallel Processing: Since transactions using different UTXOs are completely independent of each other, they can be validated in parallel. This massively increases data throughput.
- Predictable Fees: You always know in advance whether a smart contract action will fail and exactly how high the fee will be before you send. There are no lost "gas costs" for failed transactions.
- High Security: Due to the lack of a hidden global state, reentrancy attacks, which have cost hundreds of millions in other networks, are virtually impossible in the eUTXO model.