Key Takeaways
- Standardized Collaboration: PSBTs create a common language for different wallets to collaborate on a single transaction.
- Air-Gapped Security: This format is essential for signing transactions securely on offline hardware or cold storage devices.
- Simplified Multisig: PSBTs streamline multisignature setups, allowing multiple parties to sign a transaction sequentially.
What Are Partially Signed Bitcoin Transactions?
A Partially Signed Bitcoin Transaction (PSBT) is a standardized format that allows different Bitcoin applications and devices to collaborate on creating a single transaction. It contains all the necessary data—like where the funds are coming from and where they are going—but is missing the required digital signatures needed to make it valid on the network.
This format is fundamental for modern security practices. For instance, a user can create a transaction to send 0.5 Bitcoin (BTC) on an internet-connected computer and then transfer the PSBT file to a completely offline hardware wallet. The hardware wallet adds its signature to the file, authorizing the transaction without ever exposing its private keys to an online environment.
What did wallets use before PSBTs?
Before the PSBT standard was introduced, there was no universal language for wallets to exchange incomplete transaction data. Each software had its own proprietary format, making it incredibly difficult for different systems to work together on a single transaction.
The History of Partially Signed Bitcoin Transactions
Before PSBTs, coordinating transactions between different wallets was chaotic. Each developer used a unique, incompatible format, making multisignature and hardware wallet interactions difficult. This fragmentation created significant security risks and a poor user experience, highlighting the need for a universal standard to unify the ecosystem.
The solution arrived with Bitcoin Improvement Proposal (BIP) 174, authored by Andrew Chow. It established a common data structure for unsigned transactions. This allowed any compatible wallet to pass around a transaction, gather signatures from multiple parties or devices, and finalize it without exposing private keys to insecure environments.
How a Partially Signed Bitcoin Transaction Is Used
The PSBT format's flexibility opens up several powerful applications for managing bitcoin securely.
- Air-Gapped Cold Storage
A user initiates a 0.5 BTC payment on a networked computer, generating a PSBT. This file is moved via an SD card to an offline hardware wallet, which signs it without its private keys ever touching the internet, providing maximum security against online threats.
- Multisignature Wallets
For a 2-of-3 multisig setup, one party creates a PSBT to send 10 BTC. They sign it and pass the file to a second party, who adds their signature. The transaction is now valid and can be broadcasted by any party.
- Coordinated CoinJoin Transactions
Multiple users can collaboratively build a transaction to improve privacy. Each participant receives a PSBT, adds their inputs and outputs, signs their part, and returns it to a coordinator who assembles the final, fully signed transaction for broadcast.
How Do PSBTs Differ From Final Transactions?
A PSBT is a blueprint, containing all transaction details but lacking the final authorizations. A final transaction, in contrast, is a complete, signed instruction ready for the Bitcoin network to process. The key distinction is the presence or absence of the required digital signatures.
- PSBT: A mutable data structure containing unsigned inputs, proposed outputs, and metadata for signers. It is a work-in-progress file designed for collaboration.
- Final Transaction: An immutable data packet where all inputs are cryptographically signed. It is a finished product, ready for broadcast to the network.
The Future of Partially Signed Bitcoin Transactions
The PSBT standard is positioned to support more complex Bitcoin applications. Its structure is ideal for coordinating multi-party channel openings on the Lightning Network, allowing for trust-minimized setups where participants collaboratively fund a payment channel without directly sharing sensitive key information with one another.
This integration extends to advanced functions like splicing, where users add or remove funds from an active Lightning channel. PSBTs will manage the complex signing process for these on-chain transactions, making dynamic channel management more secure and accessible for users of the second-layer payment protocol.
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