If a UTXO is not added to the UTXO set before transaction is mined, how is a chain of unconfirmed transactions created? Where are the inputs taken from?
PS: I am making a blockchain from scratch. It would be really helpful if you can explain the transaction implementation considering all the possible cases.
Bitcoin Core maintains the set of unconfirmed transactions it knows about in the mempool. The mempool data structure tracks which UTXOs are consumed and created by those unconfirmed transactions. When a new transaction comes in, it will find outputs either in the UTXO set, or in the pending outputs in the mempool.
Naturally, any transaction that gets included in a block must only spend UTXOs that were created before it is spending them. Thus, any parent transactions must appear in the block before a corresponding child transaction.