PSBT (Partially Signed Bitcoin Transaction)

What Is a PSBT?

A Partially Signed Bitcoin Transaction (PSBT) is a data exchange format designed to simplify how different roles and devices coordinate during the creation of a Bitcoin transaction. Introduced via Bitcoin Improvement Proposal 174 (BIP-174), it acts as a standardized package containing the transaction data plus the signing context a signer needs, such as UTXO information and derivation paths, to verify and authorize a transaction.

Before PSBT, multisig (multi-signature) setups and offline signing workflows often relied on proprietary methods to pass data between devices. PSBT improves interoperability by providing a common language that various hardware signers, software interfaces, and coordinator tools can use to communicate. 

How Does a PSBT Work?

The PSBT lifecycle separates the construction of a transaction from the generation of signatures. This allows private keys to remain isolated on a signing device while the transaction data moves through several stages:

1. A coordinator or compatible wallet software creates the initial PSBT, identifying which UTXOs (unspent transaction outputs) to spend and the intended destination.
2. The PSBT is updated with essential context, such as the derivation paths and previous output details the signer needs to validate the inputs and ensure the transaction is legitimate.
3. The PSBT is passed to the signing device. Even without a live blockchain connection, the signer uses the metadata provided in the PSBT to verify the transaction details.
4. Once all required parties have added their signatures, the data is gathered and finalized, converting it from the PSBT format into a standard raw Bitcoin transaction.
5. The final transaction is extracted and broadcast to the Bitcoin network.

What Is PSBT Used For?

PSBT is well-suited for workflows where transaction construction and signing need to happen separately or across multiple devices. The most common use cases are:

• Multisig coordination: Multiple signers can each add their signature securely to the same PSBT independently.
• Air-gapped signing: A PSBT can be transferred to an offline signing device, signed without an internet connection, and returned for broadcast. This keeps private keys fully isolated from the network.
• Watch-only wallets: A watch-only wallet can construct and export a PSBT for signing on a separate device, allowing users to manage addresses and build transactions without ever exposing keys to an internet-connected environment.