Digital money needs to be transferable in order to be useful. In a blockchain, a transaction is initiated by the owner of the money. Transactions like these let the network know how much money is being transferred and who is the new owner.
We’ll discuss the two main ways this is done on the blockchain, Account vs eUTXO. Bitcoin employs the Unspent Transaction Output (UTXO) model, whereas Ethereum uses an Account/Balance based one. Cardano, has pioneered an Extended UTXO (eUTXO) approach.
Account Model
In a few words, here’s how the Account model on Ethereum‘s blockchain works: There’s a State machine that keeps track of the state of the address at all times. This is updated on a regular basis. The account model is similar to the accounting method of traditional businesses.
For any company, firm, or business entity to keep track of their finances accurately, a balance sheet is essential. Keeping careful records of this data enables companies to see at a glance their financial situation at any given moment. In addition, the accounting ledger allows for tracking of funds’ provenance and ownership.
UTXO Model
In a UTXO model, assets are tracked in the form of a directed acyclic graph in which nodes represent transactions and edges represent their output, where each additional transaction consumes some UTXOs and adds new ones. Wallets keep track of unspent outputs for all addresses owned by the user, and calculates the balance accordingly.
UTXO models have other advantages as well. For instance, better scalability and privacy. Moreover, the transaction logic is simplified since each UTXO can only be consumed once, resulting in a simpler transaction verification process.
eUTXO Model
The Extended UTXO (EUTXO) accounting model combines Bitcoin’s UTXO model with Ethereum’s ability to handle smart contracts. Based on Bitcoin’s UTXO model, it simply adds contract-specific information to the transaction. With EUTXO, smart contracts can be implemented on the Cardano chain.
Account vs eUTXO
The positive aspect of th eUTXO approach is that there is no State machine, no single point of failure, and every address can interact with every other address independently. A disadvantage is that it cannot send multiple transactions from one address at the same time; something quite necessary for decentralised exchange platforms (dEX), where a liquidity pool is needed so that multiple parties can send and receive funds without time lags.
The solution is that layer 2 applications will run on Cardano (Layer 1) and handle the multiple requests per block, synchronising with the blockchain on every block.
There are pros and cons to each approach. In Cardano’s approach, every new protocol and algorithm is peer-reviewed by the scientific community before implementation and release. Because of that, it takes longer, but it is built on solid foundations. Other projects prefer to release directly and let the market shape their form or correct their errors. Only time will tell which approach is better, Account vs eUTXO.