P2SH (Pay to Script Hash)

P2SH - "Pay to Script Hash" - is the script format that made complex Bitcoin Scripts practical to use as receive addresses. Introduced via BIP-16 and activated as a soft fork in April 2012, it was Bitcoin's first major address-format upgrade after P2PKH. P2SH addresses start with 3 (e.g. 3J98t1WpEZ73CNmQviecrnyiWrnqRhWNLy).

The mechanism

Before BIP-16, if you wanted to receive funds at a multisig or other complex script, the sender needed to know the full script and include it in the output - which meant longer transactions, no privacy, and awkward user experience. P2SH inverted this: receivers publish only a 20-byte hash of the script, and the actual script is revealed only when the recipient spends.

The output just locks to "the script whose hash is X." When you later spend, you reveal the actual script (the "redeem script") plus whatever it requires - signatures, preimages, locktime checks, etc.

What it enabled

• Multi-signature wallets as a usable primitive. Before P2SH, multisig was theoretically supported but practically unusable. After P2SH, users could share simple 3... addresses and receive directly to multisig setups.
• Cost transfer. The byte cost of the complex script is paid by the spender (when revealing it), not the funder. Reasonable.
• Hidden complexity. The chain shows the address, not the script structure - a privacy benefit until spent.
• A pattern for future format upgrades. The "hash-then-reveal" model from P2SH directly influenced both SegWit's native script-hash format (P2WSH) and Taproot.
• The bridge for SegWit adoption. When SegWit launched in 2017, it could be wrapped inside P2SH ("P2SH-P2WPKH") for compatibility with wallets that didn't yet understand native SegWit. P2SH-wrapped SegWit addresses also start with 3 but spend under SegWit rules.

Modern usage

P2SH is most commonly used today for legacy multisig (OP_CHECKMULTISIG-based scripts) and the wrapped-SegWit setups still in deployment. The modern successors are P2WSH (native SegWit script hash) and Taproot script-path spending - both cheaper and with cleaner properties.

BIP-16 was one of the earliest examples of how a small, carefully-designed soft fork can unlock entirely new categories of use without changing the base protocol's nature.