UTXO Model
Zcash is a Blockchain that uses the UTXO model first introduced in Bitcoin.
UTXO
Initially, every account/address has an empty balance. The only way to get coins into an account is through a transaction (TX).
Transactions take inputs and produce outputs. Except for the mining transaction called the coinbase transaction, every transaction has inputs that fund the outputs.
We’ll not consider mining or minting and therefore we’ll ignore the coinbase transaction.
Notes
Inputs and outputs are notes. They have an amount and belong to an address. The address is associated with a secret key that let’s you use the note as an input of a transaction. If you do not have the secret key, you cannot to spend the output.
For public coins, notes are in clear text. By analyzing the blockchain, one can calculate the balance of every address in use. They just need to tally every incoming note and deduct every spent note.
However, Zcash has both public and private notes. Public notes behave exactly like explained above but private notes are encrypted.
Encrypted notes also have an amount and an address but this information is not readable unless you have a viewing key.
Without the right viewing key, an encrypted note appears as random bytes. Encrypted notes are also called shielded notes.
It may be worth remembering that a note belong to a single address but an address may own any number of notes.
Unspent Transaction Outputs (UTXO)
UTXO are the notes that haven’t been spent yet.
Their total is the amount of coins in circulation. The UTXO for which you have the secret key are the funds you can spend.
Therefore it is very important that your wallet keeps track of all the UTXO you can spend.
The only way to know which UTXO are yours is to scan the blockchain and look at every transaction inputs and outputs.
Transparent UTXO
If the UTXO belong to a transparent address, a wallet can leverage an external service, for example a block explorer, and delegate the scan. The service can scan the Blockchain once and track every transparent UTXO in a database.
Zcashd can index every transaction and keep a track of every transparent address ever used.
This requires address storage and processing power, therefore zcashd needs to run
with the txindex=1 option.
Shielded UTXO
Shielded UTXO cannot be indexed by an external service or by zcashd. zcashd knows
about your shielded UTXO but it cannot possibly decrypt other users’ encrypted notes.
Therefore, your wallet must scan the blockchain itself.
To determine the balance of your shielded address, your wallet MUST scan the blockchain.