What Are Partially Signed Bitcoin Transactions?

Partially Signed Bitcoin Transactions (PSBTs) are a new type of Bitcoin transaction that enables multiple signers to enhance transaction security. 

Partially Signed Bitcoin Transactions (PSBTs) are a new Bitcoin transaction type. Read on to learn what PBSTs are, how they work, and why they are important to Bitcoin. 

What Are Partially Signed Bitcoin Transactions?

Partially Signed Bitcoin Transactions (PSBTs) enable different Bitcoin users to sign a joint transaction on the Bitcoin network. The protocol resulted from BIP 174, which was created to improve the security and flexibility of on-chain BTC transfers.

Simply put, PSTBs are like digital drafts of Bitcoin transactions. You may think of them as an initiated BTC transfer but lacking all the signatures required to validate it.

Let’s look at an analogy that best explains how they work.

Imagine Chloe and Burke want to share a cake, and both must sign a note confirming their agreement. A PSBT would be like them starting to write their names on the note but leaving sole blank spaces for their signatures. Each can then work independently and only sign on their draft once they’re ready.

Likewise, several parties can team up to create a BTC transfer using PSBTs. Each party prepares their part of the exchange and only endorses the agreement when ready to do so. Once the team collects the required signatures, it broadcasts the transaction to the blockchain for verification.

How Do Partially Signed Bitcoin Transactions Work?

PSBTs support a coordinated signing of Bitcoin transactions. To achieve that, the parties to the agreement follow the following process:

• The person coordinating the transfer creates a PSBT using their Bitcoin wallet.
• They export the PSBT from their wallet and share it with other signers, for instance, via a secure messaging app.
• The other signers then separately import that PSBT into their wallets and sign it.
• These signers export and send their respective PSBTs to the coordinator.
• On receiving these individually signed PSBTs, the coordinator merges them into one PSBT.
• The coordinator converts the single PSBT to a complete transaction.
• They then broadcast it to the blockchain for verification by the nodes.
• The process completes when the nodes validate it.

Why Are Partially Signed Bitcoin Transactions Important?

Now that we know what PSBTs are and how they work, let’s consider their importance to Bitcoin users.  

Enhance transaction security

PSBTs support signing on cold wallets without exposing your private keys. That way, they help protect you from hacks and exploits, a common feature of connected devices.

Are central to the working of multi-sig wallets 

Multi-Sig wallets require multiple users to endorse a transaction. Similarly, PSBTs require the collective signing of any exchange. They are, therefore, a perfect fit for these wallets.

Support CoinJoins 

These transactions are central to the performance of advanced BTC trading techniques like CoinJoins. Using that technique, a pool of Bitcoiners can mask the source and destination of their funds, improving their privacy.

Enhance interoperability 

PSBTs support a wide range of wallets and nodes. That enables cross-chain transactions, whose lack is one of the significant obstacles to mainstream crypto adoption.

Support collaborative transaction 

PSBTs can be used by crypto exchanges requiring more than one party’s approval. That’s because they ensure all the parties participate in its endorsement.

Increase transparency of transactions

All the parties to a transfer can review and verify its details before broadcasting it on the network. That enables them to capture the correct information on it.

Support offline transactions 

A significant part of the PSBT happens offline. This makes them an apt tool for users in regions with poor to zero internet connectivity.

Improve user experience

PSBTs simplify the creation and execution of complex BTC transactions. That way, they make accessing and using the network a good experience.

A foundation for further innovation

PSBTs are a relatively new development, and developers are exploring expanding their use cases. This technology can, therefore, serve as a catalyst for future innovation within the BTC ecosystem to its users’ gain.

Partially Signed Bitcoin Transaction Use Cases

The possible applications of PSBTs are immense, and these will only grow with time. However, here are some of their potential use cases:

Trustless Atomic Swaps

Atomic Swaps are peer-to-peer exchanges of crypto assets operating on different networks. That’s possible through the use of smart contracts. Since PSBTs are interoperable, they support such transfers.

CoinJoin Transactions

These privacy-centric measures enable several Bitcoiners to merge their transactions into one. By combining their transactions, they can protect their identities.

Multi-Sig Wallets 

These require several signatories to endorse a transaction. PSBTs enable each party to sign the transaction without exposing their private keys.

Cold Hardware Wallets 

Cold hardware wallets are non-custodial wallets that support offline crypto storage and transactions. PSBTs help to make transactions from cold wallets like air-gapped wallets safer.

Offline payments

With crypto becoming mainstream, many businesses accept payments in BTC and other digital assets. With their inherent offline nature, PSBTs could become an enabler for these payments.

Bitcoin Ordinal’s Transactions

Ordinals are a protocol that enables the creation of non-fungible tokens (NFTs) on the Bitcoin network. One can then trade these NFTs on the different marketplaces that host them, many of which use PSBT technology.

Multi-Sig BTC Custody Solutions

Bitcoin custody providers can use PSBTs to boost the security of their customers’ holdings. That’s because moving funds would require all the signatories to sign on the transaction. That prevents fraudulent activities from one individual or a group.

Partially Signed Bitcoin Transactions’ use cases will likely continue to evolve as the Bitcoin network grows and embraces more innovations on the network.