1. Boarding & Creation: VTXOs are created when users deposit into Arkade or when an existing VTXO is spent, creating new output VTXOs.
  2. Spending: VTXOs can be spent by creating Arkade Transactions that consume them as inputs and create new VTXOs as outputs. This process mirrors Bitcoin’s UTXO model, but is executed instantly.
  3. Preconfirmed State: In this state, the VTXO has been validated and cosigned by the Arkade Signer but has not yet been settled onchain. It can be spent immediately within the Virtual Mempool.
  4. Bitcoin Finality: To inherit Bitcoin’s full security guarantees, a VTXO obtains finality when included in a batch output within a commitment transaction anchored to the Bitcoin blockchain.
  5. Exit: VTXOs can be turned into onchain UTXOs either collaboratively with the operator or unilaterally through the presigned exit path.

VTXO Security Considerations

  • Expiry Risk: Users lose unilateral control of their VTXO(s) after expiry, but can reclaim those by showing an ownership proof of expired funds.
  • VTXO States: Preconfirmed VTXOs require honest operator behavior. Batch Swapping preconfirmed VTXOs gives them Bitcoin Finality.
  • Dust Outputs: VTXOs below Bitcoin’s dust limit are represented via an OP_RETURN + pubkey), making them unspendable via unilateral exit but still valid for offchain usage.
  • Deep transaction chains: VTXOs part of a deep Arkade transaction chain makes unilateral exit more expensive as all respective branch transactions would need to be broadcast.