Blockchain networks primarily use two distinct models for managing and recording transactions: the Unspent Transaction Output model (UTXO) and the account-based system. Bitcoin is an example of the UTXO system, while Ethereum uses an account-based model.

UTXO Model (e.g., Bitcoin):

• The UTXO Model: Transactions consume existing UTXOs to generate new ones. Each UTXO is a discrete amount in cryptocurrency. This is similar to the cash transactions that use specific bills or coins.docs.alchemy.com
• Transaction Processing: The system will select appropriate UTXOs when a user initiates a payment. If an exact amount cannot be determined, the system will use a larger UTXO and return the “change” as a UTXO.kraken.com
• Advantages:
  • Enhanced privacy: Generating a new address for each transaction can make it difficult to track transaction histories. nervos.org
  • Parallel Process: Independent UTXOs can be used to validate multiple transactions simultaneously, improving scalability. bitquery.io
• Challenges:
  • Complexity Managing UTXOs is complex, especially for developers and users used to traditional account systems.
  • Storage requirements: Each UTXO is stored separately. This increases storage needs. smartstate.tech

Account Based Model (e.g. Ethereum):

• Structure This model tracks the balances of all accounts. These balances are directly modified by transactions without any reference to specific inputs or out put.docs.alchemy.com
• Transaction Process The transaction includes the sender, recipient, and amount. The system debits the amount specified from the account of the sender and credits the account of the recipient.
• Advantages:
  • Simplicity The model has a more intuitive design, similar to traditional bank accounts. This makes it easier for both users and developers alike to understand and interact.
  • Smart Contract compatibility: This model allows for complex smart contract interactions. It also allows the development of sophisticated, decentralized applications. nervos.org
• Challenges:
  • Sequential Process: Transactions can be processed in a sequential manner, which may cause a bottleneck when the network is overloaded.
  • Reduced privacy: Reusing address can make it easier for users to track transaction histories. smartstate.tech

The UTXO Model offers increased privacy and the potential for parallel processing, but it comes with an increase in complexity and storage needs. The account-based system is simple and well-suited to smart contracts, but it may have issues with privacy and scalability.

This video might be helpful for a visual explanation: