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Bitcoin Script, the UTXO Model and its limitations

Bitcoin tracks ownership through Unspent Transaction Outputs (UTXOs). Each UTXO locks value to a script, typically requiring a signature to spend. Transactions consume UTXOs as inputs and create new ones as outputs. This model is local and composable: validation doesn’t depend on a global state. It naturally supports a DAG of transactions.

However, UTXOs must be confirmed onchain. This means waiting for block inclusion. Further, transactions in the Bitcoin mempool have ancestor limits and other relay policies that can limit long chains of UTXO contracts.

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Bitcoin Mempool and its Fee Market

Pending transactions wait in the mempool. Miners choose which ones to include, prioritizing by fee per byte. Since block space is scarce and block times are slow (10 min), users compete in a fee auction. This introduces unpredictable costs and results in payments being slow and expensive and rules out efficient onchain contract execution** entirely. making Bitcoin unfriendly for real-time applications.

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Batch Settlement and Virtual UTXOs (VTXOs)

Arkade leverages a Bitcoin-native transaction batching protocol that introduced Virtual UTXOs (VTXOs) and Batch Settlements. It allows users to transact offchain while retaining full custody of their funds, with deterministic exit paths back to Bitcoin L1.

VTXOs represent spendable claims enforceable via presigned Bitcoin transactions. Users transact offchain in the same manner as onchain with UTXOs: spend VTXOs, create new ones. An operator aggregates all offchain transfers, signs these virtual transactions, and settles them in the next Bitcoin block, in a batched form.

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Arkade’s Preconfirmation State

VTXOs don’t need to be settled to Bitcoin with every transfer. Instead, they can remain offchain until the user decides to anchor them to Bitcoin via a Batch Output.

Such offchain transactions obtain a preconfirmation status through the Arkade operator co-signing the VTXO transfer. The receiver can then use the resulting VTXO(s) for further offchain transactions. These preconfirmed states are fast but change trust assumptions. The operator could collude with the sender and double-spend a VTXO, introducing active collusion risk. In this case, misbehaviour can be detected and punished via a slashing mechanism.

Arkade’s preconfirmation offers speed without Bitcoin-level finality. Security improves only once VTXOs are settled onchain in the next Bitcoin block.