P2SH

P2SH, or Pay to Script Hash, is a type of Bitcoin transaction output that defers the details of the spending conditions to a separate script stored off the blockchain. It was introduced as part of a Bitcoin Improvement Proposal (BIP16) in 2012 to simplify and reduce the size of complex spending rules, such as multisignature requirements. In a P2SH output, the scriptPubKey contains a hash of a redeem script: OP_HASH160 <20-byte script hash> OP_EQUAL. The corresponding address is the Base58Check encoding of that script hash, and on mainnet these P2SH addresses typically begin with the digit 3.

When funds locked with a P2SH output are spent, the spending transaction must include, in its unlocking script (scriptSig), the redeem script itself and the data needed to satisfy it (for example, the required signatures). The network first hashes the provided redeem script and compares it to the hash in the scriptPubKey. If they match and the redeem script evaluates to true with the supplied data, the spend is valid. This mechanism moves the complexity of the conditions off-chain, while keeping the on-chain output compact and private until redemption.

Common use cases include multisignature wallets (such as 2-of-3 or 3-of-5 schemes), time-locked or condition-based spending, and other complex scripts. The main benefits are reduced on-chain data for complex setups and greater flexibility for wallet developers. A related consideration is that the redeem script becomes visible when spent, so P2SH does not provide perpetual privacy of the underlying conditions. P2SH can also wrap SegWit scripts (P2SH-P2WSH or P2SH-P2WPKH) for compatibility with newer technologies.