--- title: "Partially Signed Bitcoin Transactions (PSBT), Explained: Standardizing Offline Signing" description: "Introduced in BIP-174, PSBTs standardize how transaction data is passed between devices, enabling secure air-gapped signing and complex multisignature custody without exposing private keys to the internet." url: https://basisdesk.news/learn/psbt-partially-signed-bitcoin-transactions published: 2026-11-07T06:30:31.681Z modified: 2026-11-07T06:30:31.681Z section: Bitcoin author: Basis Desk Newsroom (AI-generated, source-verified) sentiment: neutral tickers: [BTC] tags: [PSBT, BIP-174, Hardware Wallets, Multisignature, Custody, Self-Custody] license: Quote with attribution to Basis Desk (basisdesk.news). Not financial advice. --- # Partially Signed Bitcoin Transactions (PSBT), Explained: Standardizing Offline Signing Introduced in BIP-174, PSBTs standardize how transaction data is passed between devices, enabling secure air-gapped signing and complex multisignature custody without exposing private keys to the internet. ## Key points - PSBTs (BIP-174) standardize the format for passing unsigned Bitcoin transactions between software and offline hardware wallets. - The standard packages the transaction with essential contextual data, allowing offline devices to independently verify input amounts and network fees. - PSBTs eliminate hardware wallet vendor lock-in, making it possible to mix different devices seamlessly in multisignature setups. - PSBTs are offchain data structures; they never appear on the Bitcoin blockchain itself. A **Partially Signed Bitcoin Transaction** (PSBT) is a standard format that allows multiple devices or parties to collaborate on constructing and signing a single Bitcoin ($BTC) transaction. Introduced in 2017 via Bitcoin Improvement Proposal 174 (BIP-174), the protocol standardizes the communication between internet-connected software and offline hardware wallets. This framework ensures that users can build, verify, and sign transactions collaboratively without ever exposing their private keys to a networked device. Before the adoption of PSBTs, constructing transactions across different hardware and software environments was a fragmented process. Each hardware wallet manufacturer relied on proprietary methods to pass unsigned transaction data to their devices and retrieve the signed data. This lack of standardization created vendor lock-in and made it difficult for users to mix different hardware wallets in a single [Collaborative Bitcoin Multisig Custody, Explained](https://basisdesk.news/learn/bitcoin-multisig-custody-explained) setup. ## The Data Gap in Offline Signing To understand the necessity of PSBTs, one must understand how hardware wallets operate. A hardware wallet secures private keys by keeping them offline in an **Air-gapped** environment, meaning the device never connects directly to the internet. However, to broadcast a transaction to the Bitcoin network, the transaction must first be constructed using current network data, signed by the offline keys, and then transmitted back to an internet-connected node. Offline devices face a significant data gap. When a user creates a transaction to spend **Unspent Transaction Outputs** (UTXOs), the offline signer needs to know the exact value of the UTXOs being spent to calculate the network fee. Because the fee is simply the difference between the inputs and the outputs, a hardware wallet that cannot verify the input values independently might be tricked by compromised software into signing a transaction with an exorbitant fee paid to a miner. BIP-174 solves this by requiring the transaction creator to package the unsigned transaction alongside the full UTXO data. The PSBT format acts as a secure, self-contained envelope that carries all the contextual information an offline signer needs to independently verify the transaction amounts, destinations, and fees before applying a cryptographic signature. ## The Mechanics and Roles in BIP-174 The PSBT standard defines a specific workflow divided into distinct roles. These roles are often performed automatically by wallet software, but they represent the logical steps a PSBT goes through from creation to broadcast. 1. The Creator: This role generates the initial, blank PSBT. The Creator selects the specific UTXOs to spend and specifies the destination addresses and amounts. At this stage, the transaction contains no signatures and lacks the contextual data needed for verification. 2. The Updater: The Updater adds the necessary contextual data to the PSBT. This includes the full transaction data for the UTXOs being spent, redeem scripts for multisignature setups, and hierarchical deterministic (HD) key paths that tell the hardware wallet which specific key to use for signing. 3. The Signer: This is the entity holding the private keys, typically a hardware wallet. The Signer receives the updated PSBT, inspects the contextual data to verify the input values and fees, and prompts the user to approve the transaction. Once approved, the Signer adds its cryptographic signature to the PSBT. 4. The Combiner: In scenarios involving multiple signers, each party may sign their own copy of the PSBT. The Combiner merges these separately signed PSBTs into a single file containing all the necessary signatures. 5. The Input Finalizer: This role takes the fully signed PSBT and constructs the final cryptographic witness or unlocking script for each input, satisfying the spending conditions. 6. The Transaction Extractor: Finally, the Extractor strips away all the extra contextual data that was added by the Updater, leaving only the standard, fully valid Bitcoin transaction ready to be broadcast to the network. ## A Worked Example: A Multisignature Transfer Consider a corporate treasury utilizing a 2-of-3 **Multisignature** setup. The keys are held by Alice, Bob, and Carol, using different hardware wallet brands. They wish to send 1.5 BTC to a vendor and pay a 0.0001 BTC network fee. They are spending a single UTXO worth 2.0 BTC. The internet-connected treasury software acts as the Creator and Updater. It constructs a PSBT spending the 2.0 BTC UTXO, creating an output of 1.5 BTC to the vendor, and a change output of 0.4999 BTC back to the treasury. The Updater attaches the historical transaction data proving the 2.0 BTC input exists. Alice exports this PSBT—often via a MicroSD card or a QR code—and passes it to her air-gapped hardware wallet. Her device (the Signer) reads the PSBT, verifies the 2.0 BTC input, subtracts the 1.9999 BTC total outputs, and confirms the fee is exactly 0.0001 BTC. Alice approves, and her device adds her signature to the PSBT. Bob performs the exact same process independently with his own hardware wallet. The treasury software (the Combiner and Finalizer) merges Alice and Bob's signed PSBTs, applies the signatures to the inputs, and the Extractor broadcasts the final transaction to the network. Carol's signature is not required, and no private keys ever touched a networked device. ## Air-gapped Data Transmission The PSBT format is inherently transport-agnostic. Because it is essentially a standardized string of text (often encoded in Base64 or raw binary), it can be moved between devices using various methods. Many modern hardware wallets utilize QR codes to pass PSBTs back and forth between a smartphone or laptop and the offline device. The computer displays a QR code containing the unsigned PSBT, which the hardware wallet scans using an integrated camera. After signing, the hardware wallet displays a new QR code containing the signed PSBT, which the computer scans. This optical air-gap ensures that malicious code cannot easily jump between the devices via USB cables or Bluetooth connections. For larger transactions with many inputs or complex multisignature scripts, the data payload of a PSBT can exceed the capacity of a single QR code. In these instances, devices often use animated QR codes (cycling through multiple frames) or transfer the PSBT file via a MicroSD card. ## Common Misconceptions * PSBTs are a distinct type of onchain transaction. PSBTs never appear on the Bitcoin blockchain. They are an offchain data structure used temporarily to facilitate the secure signing of a standard transaction. Once the transaction is finalized and broadcast, the PSBT ceases to exist. * Only multisignature setups require PSBTs. While highly beneficial for multisignature coordination, PSBTs are the foundational standard for almost all modern air-gapped single-signature hardware wallets. Any offline device needs the contextual data a PSBT provides to display accurate fee information. * PSBTs require an internet connection to be signed. The exact opposite is true. PSBTs were specifically engineered to allow transaction signing to occur entirely offline. Only the final extraction and broadcast steps require network access. ## What to Watch: BIP-370 and PSBTv2 The original BIP-174 standard, while effective, has limitations. Once a PSBT is created, modifying the transaction—such as adding new inputs to increase the fee during network congestion—invalidates the previous signatures and requires starting the process over. BIP-370 introduced PSBT version 2 (PSBTv2). This updated standard modifies the internal structure of the PSBT to allow for greater flexibility. PSBTv2 allows software to add new inputs and outputs to a transaction after the initial creation step, making it easier to construct complex CoinJoin transactions or dynamically adjust network fees without breaking compatibility across different hardware wallets. As the market demands more advanced custody solutions and privacy tools, the adoption of PSBTv2 by hardware manufacturers and wallet developers remains a critical infrastructure development to monitor. ## FAQ **What does PSBT stand for?** PSBT stands for Partially Signed Bitcoin Transaction. It is a standardized data format defined in BIP-174. **Do PSBTs exist on the blockchain?** No, PSBTs are purely an offchain communication format. Once a PSBT is fully signed, the standard Bitcoin transaction is extracted from it and broadcast to the blockchain. **Why do hardware wallets need PSBTs?** Hardware wallets are kept offline for security. PSBTs provide these offline devices with the exact historical UTXO data needed to verify the transaction amounts and calculate fees accurately before signing. **Can I use different hardware wallet brands together?** Yes. Because PSBTs are a universal standard across the Bitcoin ecosystem, users can combine different brands of hardware wallets within a single multisignature custody arrangement. ## Sources 1. [Bitcoin Developer Guide: Transactions](https://developer.bitcoin.org/devguide/transactions.html) — Bitcoin.org 2. [BIP 370: PSBT Version 2](https://github.com/bitcoin/bips/blob/master/bip-0370.mediawiki) — Bitcoin Core / GitHub 3. [BIP 174: Partially Signed Bitcoin Transaction Format](https://github.com/bitcoin/bips/blob/master/bip-0174.mediawiki) — Bitcoin Core / GitHub --- Basis Desk Newsroom · AI-generated, source-verified · https://basisdesk.news/about/how-we-use-ai