PSBT

A PSBT (Partially Signed Bitcoin Transaction) is a format for Bitcoin transactions that allows multiple parties to sign a transaction in a step-by-step manner before it is finalized. It enables the collaborative construction of a transaction, where each signer contributes their digital signature at different stages. This feature is useful for scenarios where several parties are involved, such as multi-signature wallets or third-party approval processes.

In practice, a PSBT starts as an unsigned transaction with all necessary details such as inputs, outputs, and amounts. Each participant can then incrementally sign the transaction with their private key. The signed transaction is then passed to the next participant for their signature. This process continues until all required signatures are added. Once all signatures are collected, the transaction is ready to be broadcast to the Bitcoin network.

The PSBT format is defined by BIP174, a Bitcoin Improvement Proposal aimed at standardizing the way partially signed transactions are created, shared, and completed. By using this format, Bitcoin wallets and services can interact in a way that allows multi-party workflows, without needing full access to each other’s private keys. This enhances privacy and security while ensuring that all participants can verify and approve the transaction at different stages.

PSBTs are particularly important for use cases like multi-signature wallets, where a transaction may require signatures from multiple parties before it is considered valid. Additionally, they enable secure collaboration between users who do not trust each other with their private keys, such as in escrow services. The ability to incrementally sign transactions also provides more control over the transaction process and can prevent malicious actors from taking advantage of incomplete or improperly signed transactions.

Key characteristics of PSBTs include the ability to allow partial signing, compatibility with hardware wallets, and flexibility in terms of which parties can sign the transaction. There are no fixed requirements for the number of signers, making PSBTs adaptable to various use cases. PSBTs can be used with both single-signature and multi-signature Bitcoin setups, making them a versatile tool for different levels of security and collaboration.