Cardano (ADA), the world’s first peer-reviewed blockchain is a 3rd generation cryptocurrency and smart contract platform that comes with the improvement of scaling problems of the first generation cryptocurrency, Bitcoin (BTC), and Ethereum (ETH), which belongs to the 2nd generation.
Unspent Transaction Output (UTXO) of Bitcoin (BTC) and Ethereum (ETH)
Unspent Transaction Output (UTXO) in cryptocurrencies is an abstraction of electronic money. This simply indicates that each UTXO represents the implementation of a chain of ownership as a chain of digital signatures, where the owner signs a message to transfer their UTXO to the public key of the receiver.
In other words, a UTXO represents an output of a blockchain transaction that has not been spent. This implies that it has not been used in a new transaction. The major example of a digital currency that uses the Unspent Transaction Output model is Bitcoin (BTC).
For a transaction to be implemented, various UTXO inputs are grouped together to create one or more outputs, which show up in the designated addresses as new unspent transactions. This process in the long run creates a simple and efficient blockchain protocol with an immutable ledger.
As for the account model of the digital token ETH, each node runs the Ethereum Virtual Machine (EVM). After initiating a transaction, the EVM calculates the new balance, which enables Ethereum to support smart contracts at the expense of high fees, mutable ledger, and inability to scale.
The Improvement of Unspent Transaction Output (UTXO) Model in Cardano (ADA)
Cardano (ADA) that is known to be a third-generation blockchain has extended the Unspent Transaction Output model, to allow support for smart contracts, while efficiency, immutability, and scalability are still well maintained.
The illustration made above forms a big part of the reason why Cardano is seemingly seen as an improvement to the scaling problems encountered by the two largest cryptocurrencies, Bitcoin (BTC) and Ethereum (ETH).
The CEO of IOHK, Charles Hoskinson, also pointed this out sometimes in June 2020, in a video interview with Layah Heilpern of Altcoin Buzz. There he tried to explain the limitations in Bitcoin (BTC) and Ethereum (ETH) that initiated the creation of Cardano (ADA).