• Cardano proposes to replace Bitcoin’s UTXO model with its more efficient EUTXO accounting model.
• EUTXO’s greater security, flexibility, and scalability, along with its energy efficiency, predictable fees, and smart contract capabilities combine into a powerful blockchain accounting model.

Cardano’s parent company Input Output has recently announced that the Cardano blockchain can help in improving the Bitcoin blockchain’s accounting model. The Cardano blockchain would combine Bitcoin’s unspent transaction output (UTXO) accounting model along with the ability to handle smart contracts into an Extended Unspent Transaction Output (EUTXO) accounting model.

Input Output noted that EUTXO offers clear benefits over other blockchain accounting models. Here’s a comparison between the two models on different aspects.

1. Global State Representation

An account-based model has a list of accounts and their balances. In an account-based model, transactions and smart contract outcomes along with other on-chain activities will constantly update the global state.

A EUTXO model will have a list of unspent outputs and their ownership details. Herein, the global state won’t change and would always extend with new UTXO.

2. Transaction Validation

With a EUTXO, each UTXO has an address, a value, and datum. The datum is passed as an additional argument during validation. This is important since it would allow a contract to carry some state without changing its code. The validator receives context, which is nothing but the information about the transaction being validated.

Input Output noted: “The success or failure of transaction validation depends only on the transaction itself and its inputs, and not on anything else on the blockchain. The validity of a transaction can be checked off-chain, before the transaction is sent to the blockchain”.

3. Transaction Fees

In an account-based model, the transaction fee is totally unpredictable. Here, the calculation of transaction fees happens on the number of computations required to complete the state transactions. In case of network congestion, the transaction fee would skyrocket.

But with a EUTXO accounting model, the transaction fee is always predictable. Here, the calculation of the fee happens on the transaction size. Since the fee doesn’t depend on the network load it’s always predictable and deterministic.

4. Scalability

Although the account-based models are concurrent, the concept of parallelism is poor in such chains. As a result, transactions are processed sequentially by design.

On the other hand, the parallelism in EUTXO accounting models allows multiple actors to progress on a certain task simultaneously without blocking each other. This allows more transactions to be validated at the same time resulting in better throughput.

5. Smart Contract Capabilities

With account-based models supporting smart contracts, transactions take place sequentially. Thus, parallelism is poor not allowing the execution of several smart contracts at once.

The EUTXO accounting model by Cardano would allow full support for Plutus contracts. This would ensure simpler parallelization of transactions within smart contracts. Thus, it’s possible to process multiple UXTOs in different transactions at the same time.

6. DEX Development

Account-based models have made it extremely simple in implementing AMMs. However, it comes with some inherent deficiencies such as the tendency to incur an impermanent loss. Cardano’s EUTXO accounting model solves this problem. I

Input Output noted: “EUTXO’s design is better suited for DEXs built on order book architecture since the EUTXO model greatly mitigates the effects of impermanent loss”.

Another benefit of EUTXO is that it can facilitate parallel dApp execution along with enabling higher throughputs.