CS120: Bitcoin for Developers I

Pay-to-Script-Hash (P2SH) was introduced in 2012 as a powerful new type of transaction that greatly simplifies the use of complex transaction scripts. To explain the need for P2SH, let's look at a practical example.

Earlier, we introduced Mohammed, an electronics importer based in Dubai. Mohammed's company uses bitcoin's multisignature feature extensively for its corporate accounts. Multisignature scripts are one of the most common uses of bitcoin's advanced scripting capabilities and are a very powerful feature. Mohammed's company uses a multisignature script for all customer payments, known in accounting terms as "accounts receivable," or AR. With the multisignature scheme, any payments made by customers are locked in such a way that they require at least two signatures to release, from Mohammed and one of his partners or from his attorney who has a backup key. A multisignature scheme like that offers corporate governance controls and protects against theft, embezzlement, or loss.

The resulting script is quite long and looks like this:

<mohammed's public="" key="">2 <Mohammed's Public Key> <Partner1 Public Key> <Partner2 Public Key> <Partner3 Public Key> <Attorney Public Key> 5 CHECKMULTISIG
</mohammed's>

Although multisignature scripts are a powerful feature, they are cumbersome to use. Given the preceding script, Mohammed would have to communicate this script to every customer prior to payment. Each customer would have to use special bitcoin wallet software with the ability to create custom transaction scripts, and each customer would have to understand how to create a transaction using custom scripts. Furthermore, the resulting transaction would be about five times larger than a simple payment transaction, because this script contains very long public keys. The burden of that extra-large transaction would be borne by the customer in the form of fees. Finally, a large transaction script like this would be carried in the UTXO set in RAM in every full node, until it was spent. All of these issues make using complex locking scripts difficult in practice.

P2SH was developed to resolve these practical difficulties and to make the use of complex scripts as easy as a payment to a bitcoin address. With P2SH payments, the complex locking script is replaced with its digital fingerprint, a cryptographic hash. When a transaction attempting to spend the UTXO is presented later, it must contain the script that matches the hash, in addition to the unlocking script. In simple terms, P2SH means "pay to a script matching this hash, a script that will be presented later when this output is spent."

In P2SH transactions, the locking script that is replaced by a hash is referred to as the redeem script because it is presented to the system at redemption time rather than as a locking script. Complex script without P2SH shows the script without P2SH and Complex script as P2SH shows the same script encoded with P2SH.

Table 1. Complex script without P2SH

Table 2. Complex script as P2SH

As you can see from the tables, with P2SH the complex script that details the conditions for spending the output (redeem script) is not presented in the locking script. Instead, only a hash of it is in the locking script and the redeem script itself is presented later, as part of the unlocking script when the output is spent. This shifts the burden in fees and complexity from the sender (who creates the transaction) to the recipient (who unlocks and spends the transaction).

Let's look at Mohammed's company, the complex multisignature script, and the resulting P2SH scripts.

First, the multisignature script that Mohammed's company uses for all incoming payments from customers:

2 <mohammed's public="" key="">     <Mohammed's Public Key> <Partner1 Public Key> <Partner2 Public Key>
 <Partner3 Public Key> <Attorney Public Key> 5 CHECKMULTISIG</mohammed's>

If the placeholders are replaced by actual public keys (shown here as 520-bit numbers starting with 04) you can see that this script becomes very long:

2
04C16B8698A9ABF84250A7C3EA7EEDEF9897D1C8C6ADF47F06CF73370D74DCCA01CDCA79DCC5C3
95D7EEC6984D83F1F50C900A24DD47F569FD4193AF5DE762C58704A2192968D8655D6A935BEAF2
CA23E3FB87A3495E7AF308EDF08DAC3C1FCBFC2C75B4B0F4D0B1B70CD2423657738C0C2B1D5CE6
5C97D78D0E34224858008E8B49047E63248B75DB7379BE9CDA8CE5751D16485F431E46117B9D0C
1837C9D5737812F393DA7D4420D7E1A9162F0279CFC10F1E8E8F3020DECDBC3C0DD389D9977965
0421D65CBD7149B255382ED7F78E946580657EE6FDA162A187543A9D85BAAA93A4AB3A8F044DAD
A618D087227440645ABE8A35DA8C5B73997AD343BE5C2AFD94A5043752580AFA1ECED3C68D446B
CAB69AC0BA7DF50D56231BE0AABF1FDEEC78A6A45E394BA29A1EDF518C022DD618DA774D207D13
7AAB59E0B000EB7ED238F4D800 5 CHECKMULTISIG

This entire script can instead be represented by a 20-byte cryptographic hash, by first applying the SHA256 hashing algorithm and then applying the RIPEMD160 algorithm on the result.

We use libbitcoin-explorer (bx) on the command-line to produce the script hash, as follows:

echo \
2 \
[04C16B8698A9ABF84250A7C3EA7EEDEF9897D1C8C6ADF47F06CF73370D74DCCA01CDCA79DCC5C395D7EEC6984D83F1F50C900A24DD47F569FD4193AF5DE762C587] \
[04A2192968D8655D6A935BEAF2CA23E3FB87A3495E7AF308EDF08DAC3C1FCBFC2C75B4B0F4D0B1B70CD2423657738C0C2B1D5CE65C97D78D0E34224858008E8B49] \
[047E63248B75DB7379BE9CDA8CE5751D16485F431E46117B9D0C1837C9D5737812F393DA7D4420D7E1A9162F0279CFC10F1E8E8F3020DECDBC3C0DD389D9977965] \
[0421D65CBD7149B255382ED7F78E946580657EE6FDA162A187543A9D85BAAA93A4AB3A8F044DADA618D087227440645ABE8A35DA8C5B73997AD343BE5C2AFD94A5] \
[043752580AFA1ECED3C68D446BCAB69AC0BA7DF50D56231BE0AABF1FDEEC78A6A45E394BA29A1EDF518C022DD618DA774D207D137AAB59E0B000EB7ED238F4D800] \
5 CHECKMULTISIG \
| bx script-encode | bx sha256 | bx ripemd160
54c557e07dde5bb6cb791c7a540e0a4796f5e97e

The series of commands above first encodes Mohammed's multisig redeem script as a serialized hex-encoded bitcoin Script. The next bx command calculates the SHA256 hash of that. The next bx command hashes again with RIPEMD160, producing the final script-hash:

The 20-byte hash of Mohammed's redeem script is:

A P2SH transaction locks the output to this hash instead of the longer redeem script, using the locking script:

HASH160 54c557e07dde5bb6cb791c7a540e0a4796f5e97e EQUAL

which, as you can see, is much shorter. Instead of "pay to this 5-key multisignature script," the P2SH equivalent transaction is "pay to a script with this hash." A customer making a payment to Mohammed's company need only include this much shorter locking script in his payment. When Mohammed and his partners want to spend this UTXO, they must present the original redeem script (the one whose hash locked the UTXO) and the signatures necessary to unlock it, like this:

<Sig1> <Sig2> <2 PK1 PK2 PK3 PK4 PK5 5 CHECKMULTISIG>

The two scripts are combined in two stages. First, the redeem script is checked against the locking script to make sure the hash matches:

<2 PK1 PK2 PK3 PK4 PK5 5 CHECKMULTISIG> <redeem scriptHASH>  EQUAL

If the redeem script hash matches, the unlocking script is executed on its own, to unlock the redeem script:

<Sig1> <Sig2> 2 PK1 PK2 PK3 PK4 PK5 5 CHECKMULTISIG

Almost all the scripts described in this chapter can only be implemented as P2SH scripts. For example, a 2 of 5 standard multisignature locking script cannot be used directly in the locking script of an UTXO, as IsStandard() would invalidate the transaction. To conform, a P2SH locking script can be used instead, as seen above. A transaction that then includes a P2SH unlocking script can be used to redeem this UTXO and will be valid so long as it does not contain more than 15 public keys.

Tip: Remember, because of policy set forth by the IsStandard() function at the time of this writing, standard multisignature scripts are limited to at most 3 listed public keys, while P2SH scripts are limited to at most 15 listed public keys. Standard multisignature scripts can invalidate transactions by way of their locking or unlocking script, while P2SH scripts can invalidate transactions by way of their unlocking script only. This is because there is no way for IsStandard() to tell if a hash of a redeem script in a locking script includes more signatures than the currently imposed size limitation, so it can only observe the unlocking scripts in transaction inputs.