What is a UTXO?
A basic component to any Cardano transaction is a transaction output. Transaction outputs are indivisible chunks of ada recorded on the Cardano blockchain. Cardano full nodes track all available and spendable transaction outputs. These are called unspent transaction outputs, and are commonly referred to as UTXOs.
When you receive ada to your Daedalus wallet, it simply means Daedalus has identified a UTXO that can be spent with the keys managed by your wallet. Consider the ada balance displayed in Daedalus as the sum of all available UTXOs that your wallet is able to spend. Daedalus determines your balance by scanning the Cardano blockchain and aggregating the value of any UTXO the wallet is able to spend with the keys associated to your wallet. Therefore, your ada is stored on the Cardano blockchain, and not within Daedalus itself.
A UTXO can only be consumed in full by a transaction and it cannot be divided. If a UTXO happens to be larger than the intended value of a transaction, it must still be completely consumed, and therefore, change is generated. For instance, if you have a UTXO of 50 ada would only like to spend 10 ada, your transaction needs to consume the whole 50 ada UTXO and generate two outputs. In this scenario, one output pays 10 ada to the intended recipient, and the other output pays 40 ada in change back to your Daedalus wallet.
The concept of how UTXOs are consumed can be better understood when viewed in the context of using cash. For example, you would like to purchase a product for $10, but you do not have the exact amount in bills and/or coins to pay for the item, rather, you only have a $50 bill. Therefore, you pay with a $50 bill, and receive $40 in change from the cashier.
Wallet UTXO Distribution
The "Wallet UTXO distribution" screen in Daedalus provides a graphical representation of the distribution of UTXOs with different amounts of ada for a wallet. This screen is accessible through wallet navigation under the menu item "More."
The wallet in the example image above has over 131,000 ada spread out across 21 UTXOs. When you mouse over each bar on the graph, you are able to view the specific UTXO distribution details for how your ada is organized in your Daedalus wallet.
The Wallet UTXO Distribution screen can be a useful reference point when ada in the wallet is spread across too many UTXOs. In this scenario, when attempting to send ada, Daedalus will display the error Transaction too big due to too many inputs.
To resolve this issue, you will need to create a transaction to consolidate the small amounts of ada spread out over many UTXOs. To do this, you can try sending a small amount of ada to yourself. Then, as a point of reference, you can navigate to the Wallet UTXO Distribution screen to view how your UTXOs are distributed.