As a blockchain and cryptocurrency expert with over a decade of experience, I‘m often asked to compare two pivotal blockchain transaction mechanisms – Partially Signed Bitcoin Transactions (PSBT) and smart contracts.
Both introduce new ways to transact value online. But they function differently under the hood.
In this comprehensive guide, I‘ll leverage my expertise to explore:
- What are PSBT and smart contracts and their use cases
- How PSBT and smart contracts differ in key areas
- When to use each based on your needs
My goal is to provide the most in-depth, insightful comparison between PSBT and smart contracts available today.
I‘ll share my unique perspective gained from years working hands-on with blockchain transactions, digging into the critical distinctions between these tools.
Let‘s get started!
What is PSBT?
First, what exactly is a partially signed bitcoin transaction, better known as PSBT?
PSBT is a transaction format specific to Bitcoin. It contains information required for signers to authorize a Bitcoin transaction.
More specifically, PSBT enables multi-signature transactions. This means multiple signers must approve a transaction before it can execute.
PSBT acts as a flexible courier that facilitates collecting signatures from all required signers. It shuttles the unsigned transaction between signers until reaching the needed threshold of signatures.
Who created PSBT and when?
PSBT was introduced through Bitcoin Improvement Proposal 173 (BIP-173).
It was created by blockchain developer Andrew Chow in 2019 to improve Bitcoin‘s handling of complex, multi-party transactions.
What are the major benefits of PSBT?
Based on my experience, the main advantages of PSBT are:
-
Standardization – PSBT provides a common format for constructing and signing complex Bitcoin transactions. This simplifies building tools and coordinating across multiple parties.
-
Flexibility – Users can partially sign transactions as needed, passing the PSBT file between signers until fully authorized. This flexibility is perfect for multi-signature transactions.
-
Security – Multi-signature capabilities reduce single points of failure by requiring multiple signers to approve transfers. This prevents unilateral control over funds.
-
Privacy – PSBTs allow constructing complete transactions, gathering signatures, and finalizing transactions without ever exposing private keys. This enhances security and privacy.
Now let‘s explore some major use cases where PSBT shines.
Key PSBT use cases
From multi-signature wallets to hardware wallets and beyond, PSBT unlocks several key blockchain transaction use cases:
1. Multi-signature wallets
One of PSBT‘s main applications is enabling multi-signature (multisig) wallets.
Multisig wallets require more than one private key to authorize transactions. For example, a 2-of-3 multisig wallet needs two out of three private keys to approve a transfer.
This prevents any single entity from unilaterally controlling funds. PSBT‘s flexibility excels at shuttling unsigned transactions between signers to collect sufficient signatures.
According to BitGo, a cryptocurrency security company, 81% of its clients use multi-signature wallets. This demonstrates the large market demand for multi-signature capabilities.
PSBT adoption will likely continue rising as more entities embrace multi-signature wallets for enhanced security.
2. Hardware wallets
Hardware wallets like Trezor or Ledger offer excellent security by physically storing users‘ private keys offline. But sending transactions can be tedious – users must shuttle data back and forth between the hardware device and an online wallet.
PSBT simplifies this process through a standardized transaction building, signing, and broadcasting flow involving hardware wallets.
This enhances security by eliminating the need to ever expose private keys online, even during transactions.
According to Research and Markets, the global hardware wallet market will grow at a 12% CAGR from 2022-2026. PSBT will likely enable broader hardware wallet adoption by streamlining their transaction flows.
3. CoinJoins
PSBT also facilitates privacy-enhancing CoinJoin transactions.
CoinJoins combine multiple users‘ Bitcoin payments into a single transaction with multiple inputs and outputs. This obscures which spender paid which recipient, improving anonymity.
But coordinating these complex multi-party transactions previously proved challenging.
PSBT provides a standardized format to construct, share, and sign a single transaction with the combined inputs and outputs from all participants. This makes large-scale CoinJoins viable.
4. Custodial multisig solutions
Exchanges and custodians securing client assets can use PSBT for a simple yet secure custodial solution.
They first create a multi-signature address requiring both the custodian and client to approve withdrawals. The custodian holds 1 key, the client holds another, and possibly a third backup key held by a third party for account recovery.
To withdraw, the custodian creates a PSBT with the withdrawal transaction and signs it. They send this partially signed PSBT to the client, who then adds their signature to fully authorize it.
This flow allows secure custody without requiring clients to manually deposit/withdraw each time, simplifying the user experience.
5. Complex transaction templates
Developers can also use PSBT to construct intricate Bitcoin transactions that are impractical to build on-the-fly, like:
- Time-locked transactions – Transactions that only execute after a set time period passes.
- Hash-locked transactions – Transactions whose outputs rely on a cryptographic hash.
Developers build templates for these complex transactions, with necessary inputs, outputs, and unlocking scripts.
These templates can be shared using PSBTs. Signers then partially sign the transaction by adding signatures, data, etc. without exposing private keys.
Once the PSBT transaction is fully signed, it can be finalized and broadcast to execute.
This saves developers time while keeping private keys secure.
6. Ordinals NFT minting
PSBT is also instrumental for minting NFTs on Ordinals, a protocol for creating provably scarce collectibles on Bitcoin.
Ordinals allow directly inscribing data like art and documents on-chain by encoding them in OP_RETURN outputs. Users can mint these NFTs through an intuitive UI powered by PSBT.
PSBT enables seamlessly signing these on-chain NFT transactions in the background. This provides an easy yet secure NFT minting experience.
Ordinals NFT sales surpassed $1 million in 2024, demonstrating growing demand for permissionless and provably scarce NFTs minted on Bitcoin.
As the NFT market expands, expect more reliance on PSBT for securely coordinating on-chain mints.
What are smart contracts?
Now that you understand PSBT, what about smart contracts? How do they differ?
Smart contracts are programmatic contracts with agreement terms directly written into lines of executable code. They are stored and execute on blockchains like Ethereum.
The key difference from PSBT is smart contracts are self-executing. Once deployed, they run automatically when predefined conditions are met.
For example, a smart contract could automatically send User B $10 if User A sends a specified "trigger" transaction. This transaction instantly and programmatically triggers the smart contract‘s execution per its coded logic.
Smart contracts eliminate manual intermediaries and oversight. Users only deploy them upfront.
Key smart contract use cases
While newer than PSBT, smart contracts now see extensive use across domains like:
Decentralized finance (DeFi)
Smart contracts are the backbone of the booming DeFi ecosystem.
DeFi platforms like Aave allow users to automatically lend, borrow, earn interest, trade assets, and more via smart contracts. DeFi aims to recreate traditional financial services in a permissionless, programmable format.
DeFi‘s total value locked exceeded $100 billion in 2024, underscoring smart contracts‘ usefulness.
Supply chain monitoring
Smart contracts can track assets across supply chains via tamper-proof logs. This simplifies provenance tracking and preventing counterfeits.
For example, Walmart uses smart contracts to track certain food items from farm to store shelves. Scanning a food‘s QR code provides its supply chain history.
Gaming
Smart contracts power blockchain-based games and assets like Axie Infinity. Game assets like NFT characters are stored as smart contracts. Transparent ownership records simplify transfers and trades.
Financial services
Banks use smart contract infrastructure like Symbiont to simplify management of complex financial instruments. This improves data sharing and transparency between institutions.
Smart contracts completely automate processes that previously required manual oversight and settlement between parties. This unlocks major efficiency gains.
Clearly, smart contracts enable unique programmability tailored to a variety of transactions and applications.
Key differences between PSBT and smart contracts
While PSBT and smart contracts both facilitate blockchain transactions, they differ fundamentally:
1. Transaction management philosophy
Their core transaction management philosophies differ:
-
PSBT focuses on flexibility, standardization, and coordination for complex, multi-party Bitcoin transactions. Users drive the process by shuttling, signing, and finalizing PSBT transactions.
-
Smart contracts emphasize automated, conditional execution according to predefined logic coded into the contract. Once deployed, they execute independently without user oversight.
2. Execution and finalization
This leads to major differences in execution flows:
-
PSBT transactions require users to manually sign and finalize transactions by combining signatures into a fully signed transaction. Their flexibility introduces some friction to accommodate user coordination.
-
Smart contracts entirely automate execution per their coded conditions. They do not require any manual oversight or signatures after deployment. This automation provides smoother execution, but less flexibility.
3. Blockchain support
PSBT and smart contracts are tailored for different blockchain networks:
-
PSBT was created specifically to improve complex transaction handling on Bitcoin and is Bitcoin-exclusive.
-
Smart contracts primarily run on Ethereum and other blockchains with expressive scripting languages like Solidity. Recently smart contracts were introduced to Bitcoin but with limited capabilities.
The below table summarizes further technical differences:
| Attribute | PSBT | Smart Contracts |
|---|---|---|
| Available networks | Bitcoin | Ethereum, Tron, Solana, Cardano, etc. |
| Language | Bitcoin Script (not Turing complete) | Turing-complete languages like Solidity and Vyper |
| Conditional logic | None | Yes, code conditions that trigger execution |
| Automated execution | No, requires signers | Yes, self-executing after deployment |
4. Privacy preservation
PSBT offers stronger privacy protections:
-
PSBT allows constructing complete transactions before signing. This prevents exposing intermediate transaction data.
-
Smart contracts publically publish their full code, which can reveal details about transaction logic and participants.
5. Use cases
Due to their differences, PSBT and smart contracts suit different use cases:
-
PSBT excels where high Bitcoin transaction security, standardization, coordination, and privacy are critical – like multisig setups, hardware wallets, account recovery, NFT mints.
-
Smart contracts shine for automating complex logic and conditional payments across many blockchain networks and applications – like DeFi, supply chain tracking, financial services.
When should you use PSBT vs smart contracts?
Based on their distinct capabilities, here is guidance on when to choose PSBT vs smart contracts:
Use PSBT for:
- Bitcoin transactions, especially those needing multi-signature security.
- Any transaction requiring manual coordination across multiple signers.
- Situations where transaction privacy and lack of public visibility are vital.
- Flows compatible with Bitcoin Script‘s limited flexibility.
- NFT minting and trading for projects like Ordinals building on Bitcoin.
Use smart contracts for:
- Implementing automated logic and conditional payments, without ongoing user involvement.
- Developing on Turing-complete smart contract blockchains like Ethereum or Solana.
- Powering decentralized applications (dApps) with transparent, programmable state and business logic.
- Replicating real-world agreements, assets, and processes in an automated, blockchain-based format.
- Use cases involving complex conditional logic beyond Bitcoin Script‘s capabilities.
Conclusion
Deciding between PSBT and smart contracts requires understanding their core differences:
-
PSBT enables flexible construction and signing of complex, multi-party Bitcoin transactions.
-
Smart contracts execute automatically based on predefined coded logic across various blockchain networks.
Both methods have their own strengths. For Bitcoin transactions requiring air-tight security, multi-signature functionality, and user coordination, PSBT is likely the superior fit.
For automated programmatic logic and conditional payments – especially across smart contract networks like Ethereum – smart contracts will be preferable.
By choosing the right tool for your needs, you can tap into the unique benefits of both PSBT and smart contracts to build cutting-edge, highly secure blockchain transaction systems.
Does this help summarize when each method excels? Let me know if you have any other questions! I‘m happy to discuss further.