With tools like PSBT (Partially Signed Bitcoin Transactions) and smart contracts, blockchain technology has changed the way online transactions are made. And as the economy embraces DeFi (decentralized finance) more1, it’s important for business leaders to familiarize themselves with these different blockchain tools to benefit from:
- Reduced costs
- Increased customer satisfaction
- Minimized fraud
For example, if someone wants to build a product or service on a blockchain, they need to know how the tools they can use vary. Perhaps a service that needs complicated, automated transactions might work better with Ethereum’s smart contracts, while a solution that focuses on the security of transactions between more than two parties might work better with Bitcoin’s PSBT standard.
That’s why in this article, we will be explaining in depth:
- Partially signed bitcoins transactions (PSBTs) and smart contracts
- Their differences
- Their use cases
What is PSBT?
A partially signed bitcoin transaction (PSBT) is a binary transaction format in Bitcoin that contains the necessary information for signers to authorize a transaction. In other words, PSBT is a protocol that requires multiple parties’ authorization before execution.
What are the use cases of partially signed bitcoin transactions (PSBTs)?
The use cases of partially signed transactions include:
1. Multi-signature wallets:
Multi-signature wallets (or multisig wallets) require more than 1 private key for the same transaction to authorize it. For example, a 2/3 multisig wallet needs 2 out of the 3 required private keys to authorize a transaction.
PSBT format is useful here because it improves the portability of unsigned transactions. It acts as a courier, moving the transaction between multiple parties, collecting their signatures.
2. Hardware wallets
Hardware wallets physically store cryptocurrency. However, safety is sacrificed for back-and-forth shuttling between the wallet and an online device, like a computer.
PSBT can standardize the process, simplifying building, signing, and sending the unsigned transaction that involves hardware wallets.
3. CoinJoins
Partially signed transaction solution can facilitate CoinJoin transactions, a privacy-enhancing technique that combines multiple Bitcoin payments from multiple spenders into a final transaction, making it harder for outside parties to determine who is paying whom.
4. Multisig custody solutions
When a company is safekeeping a client’s bitcoin, they can use a PSBT file to create a multi-signature transaction that would require the company’s and the client’s signature before transferring funds.
5. Complex transaction templates
Partially signed bitcoin transactions can help construct complex bitcoin transactions involving time or hash locks. With PSBT, an unsigned transaction can be created with the necessary transaction inputs, outputs, and scripts for the time or hash lock.
This transaction can then be passed between parties or devices to add any necessary data or signatures, without ever exposing the private keys. Once all the necessary data and signatures have been added, the transaction can be finalized and broadcast to the network.
6. Ordinals marketplaces
PSBT solutions are widely used by Ordinals marketplaces such as Gamma.io and Magic Eden. The Ordinals protocol allows users to create Bitcoin NFTs. UI-friendly and intuitive tools like Gamma.io’s no-code launchpad allow anyone to inscribe their art, text and more directly onto the Bitcoin blockchain. PSBT makes this process secure, while remaining seamless for users.
What are smart contracts?
Smart contracts are self-executing contracts that can work between different wallet software and have agreement terms written directly into the lines of code. These contracts are executed when predefined conditions are met.
As of recently, smart contracts were solely on Ethereum, Stacks, and other compatible blockchains, but particularly not Bitcoin due to its programmability limitations. While not impossible, creating smart contracts on the Bitcoin blockchain has proven to be difficult and limited, both for users and creators
What are the use cases of smart contracts?
We’ve gone over the various use cases of smart contracts before, so we won’t delve too deep into this topic. But smart contracts are mostly used in:
How can PSBT and smart contracts be confused with each other?
Both PSBT and smart contracts serve a similar purpose as tools for completing transactions on a blockchain.
Moreover, they are used in complex transactions – PSBT for multi-partially signed bitcoin transactions, and smart contracts for conditional ones.
Lastly, both PSBTs and smart contracts add an additional layer of security to transactions. PSBT does that via requiring signatures, and smart contracts by upholding IF/THEN conditions.
What are the differences between PSBT and smart contracts?
Although both partially signed bitcoin transactions files and smart contracts execute transactions and increase their security, they are fundamentally different from each other.
1. Transaction management
The major difference between PSBT and smart contracts is transaction management.
- PSBT allows complex Bitcoin transactions to be constructed, signed, and broadcast in a flexible and secure manner, with a special focus on multi-party coordination and approval.
- Smart contracts enable transactions to be automated based on predefined conditions written in the contract’s code. They are self-executing and do not require manual intervention once deployed.
2. Blockchain network
- PSBT is a protocol specific to the Bitcoin network, addressing Bitcoin’s need for a standardized format for multi-signature and hardware wallet transactions.
- Smart contracts, however, are a feature of Ethereum and similar blockchains that support Turing-complete programming languages. While smart contracts have recently become deployable on Bitcoin, the network’s scripting language is not Turing complete, limiting the complexity of smart contracts that can be implemented.
3. Applications
PSBT and smart contracts find their applications in different areas.
- PSBT improves Bitcoin’s handling of complex transactions that require multiple signatures, making it an excellent choice for security-focused applications or situations requiring multiple approvers.
- Smart contracts have broad use cases in decentralized applications (DApps), DeFi, NFTs, and more. Their automatic execution capability makes them ideal for creating programmable, conditional transactions, and decentralized applications.
For more on NFTs
To learn more about NFTs, read:
- “Decentralized Finance Gains Ground In The GCC.” Yahoo! Finance. June 6, 2023. Retrieved on June 20, 2023.
