diff --git a/node/uhpo/src/payout_settlement.rs b/node/uhpo/src/payout_settlement.rs
index 835fe26..53d91d6 100644
--- a/node/uhpo/src/payout_settlement.rs
+++ b/node/uhpo/src/payout_settlement.rs
@@ -1,3 +1,228 @@
-pub struct PayoutSettlement {}
+use std::collections::HashMap;
 
-impl PayoutSettlement {}
+use bitcoin::{Address, Amount, Transaction, TxOut};
+use secp256k1::Scalar;
+
+use crate::{
+    crypto::{
+        add_signature,
+        signature::{KeypairBehavior, Secp256k1Behavior, SecretKeyBehavior},
+    },
+    transaction::TransactionBuilder,
+    UhpoError,
+};
+
+// `PayoutSettlement` represents an cashout of an Eltoo style payout.
+pub struct PayoutSettlement {
+    transaction: Transaction,
+
+    // `prev_update_txout` is the output of the latest Eltoo style `PayoutUpdate` it is stored and later used to sign inputs.
+    prev_update_txout: TxOut,
+}
+
+impl PayoutSettlement {
+    /// Creates a new `PayoutSettlement`
+    ///
+    /// # Arguments
+    /// * `latest_eltoo_out` - The output of the latest `PayoutUpdate`
+    /// * `payout_map` - A map of payout addresses to payout amounts
+    ///
+    /// # Returns
+    /// Result containing a new `PayoutSettlement` or an `UhpoError`
+    pub fn new(latest_eltoo_out: Transaction, payout_map: HashMap<Address, Amount>) -> Self {
+        // payout_update_tx would always have vout set to 0
+        let builder = TransactionBuilder::new().add_input(latest_eltoo_out.compute_txid(), 0);
+
+        let builder = payout_map
+            .into_iter()
+            .fold(builder, |builder, (address, amount)| {
+                builder.add_output(address, amount)
+            });
+
+        PayoutSettlement {
+            transaction: builder.build(),
+            prev_update_txout: latest_eltoo_out.output[0].clone(),
+        }
+    }
+
+    /// Adds a signature to the latest `PayoutUpdate`
+    ///
+    /// # Arguments
+    /// * `private_key` - The private key to sign with
+    /// * `tweak` - An optional tweak
+    /// * `secp` - The secp256k1 context
+    ///
+    /// # Returns
+    /// Result indicating success or an `UhpoError`
+    pub fn add_prev_update_sig<S, K, E>(
+        &mut self,
+        private_key: S,
+        tweak: Option<&Scalar>,
+        secp: &E,
+    ) -> Result<(), UhpoError>
+    where
+        S: SecretKeyBehavior<K, E>,
+        K: KeypairBehavior<E>,
+        E: Secp256k1Behavior + 'static,
+    {
+        let prevouts = vec![&self.prev_update_txout];
+
+        add_signature(
+            &mut self.transaction,
+            0,
+            &prevouts,
+            private_key,
+            tweak,
+            secp,
+        )
+    }
+
+    pub fn build(self) -> Transaction {
+        self.transaction
+    }
+}
+
+// unit tests
+#[cfg(test)]
+mod tests {
+    use bitcoin::{absolute::LockTime, transaction::Version, Network, ScriptBuf};
+    use rand::Rng;
+    use secp256k1::{All, Keypair, Secp256k1, SecretKey};
+
+    use crate::crypto::signature::{
+        MockKeypairBehavior, MockSecp256k1Behavior, MockSecretKeyBehavior,
+    };
+
+    use super::*;
+
+    fn create_dummy_transaction(amount_out: Amount) -> Transaction {
+        Transaction {
+            version: Version::TWO,
+            lock_time: LockTime::ZERO,
+            input: vec![],
+            output: vec![TxOut {
+                value: amount_out,
+                script_pubkey: ScriptBuf::default(),
+            }],
+        }
+    }
+
+    fn setup(miner_count: u64) -> (Secp256k1<All>, Keypair, HashMap<Address, Amount>, u64) {
+        let secp = Secp256k1::new();
+        let mut rng = rand::thread_rng();
+
+        let data: [u8; 32] = rng.gen();
+        let keypair = SecretKey::from_slice(&data).unwrap().keypair(&secp);
+
+        let mut total_amount = 0;
+        let cashout_map: HashMap<Address, Amount> = (0..miner_count)
+            .map(|_| {
+                let data: [u8; 32] = rng.gen();
+                let keypair = SecretKey::from_slice(&data).unwrap().keypair(&secp);
+                let new_user_address: Address =
+                    Address::p2tr(&secp, keypair.x_only_public_key().0, None, Network::Regtest);
+
+                let amount = rng.gen::<u32>();
+                total_amount += amount as u64;
+                (new_user_address, Amount::from_sat(amount as u64))
+            })
+            .collect();
+
+        (secp, keypair, cashout_map, total_amount)
+    }
+
+    #[test]
+    fn test_payout_settlement() {
+        let (_, _, cashout_map, total_amount) = setup(3);
+        let latest_payout_update = create_dummy_transaction(Amount::from_sat(total_amount + 1000));
+
+        let settlement_tx =
+            PayoutSettlement::new(latest_payout_update, cashout_map.clone()).build();
+
+        assert!(settlement_tx.output.len() == 3);
+        assert!(settlement_tx.input.len() == 1);
+
+        settlement_tx.output.iter().for_each(|o| {
+            let address = Address::from_script(&o.script_pubkey, Network::Regtest).unwrap();
+            assert!(
+                cashout_map
+                    .get(&address)
+                    .expect("Address not found in cashout_map")
+                    == &o.value
+            );
+        });
+    }
+
+    #[test]
+    fn test_add_signature_with_no_tweak() {
+        let (secp, keypair, cashout_map, _) = setup(3);
+        let latest_payout_update = create_dummy_transaction(Amount::from_sat(1000));
+
+        let mut payout_settlement = PayoutSettlement::new(latest_payout_update, cashout_map);
+
+        payout_settlement
+            .add_prev_update_sig(keypair.secret_key(), None, &secp)
+            .expect("Failed to add signature");
+
+        assert_eq!(payout_settlement.transaction.input[0].witness.len(), 1);
+        assert_eq!(payout_settlement.transaction.input[0].witness[0].len(), 65);
+    }
+
+    #[test]
+    fn test_add_signature_with_tweak() {
+        let (secp, keypair, cashout_map, _) = setup(3);
+        let latest_payout_update = create_dummy_transaction(Amount::from_sat(1000));
+
+        let mut payout_settlement = PayoutSettlement::new(latest_payout_update, cashout_map);
+
+        payout_settlement
+            .add_prev_update_sig(
+                keypair.secret_key(),
+                Some(&Scalar::random_custom(&mut rand::thread_rng())),
+                &secp,
+            )
+            .expect("Failed to add signature");
+
+        assert_eq!(payout_settlement.transaction.input[0].witness.len(), 1);
+        assert_eq!(payout_settlement.transaction.input[0].witness[0].len(), 65);
+    }
+
+    #[test]
+    fn test_add_signature_mock_error_should_fail() {
+        let (_, _, cashout_map, _) = setup(3);
+        let latest_payout_update = create_dummy_transaction(Amount::from_sat(1000));
+
+        let mut payout_settlement = PayoutSettlement::new(latest_payout_update, cashout_map);
+
+        // setup mocks
+        let mock_secp = MockSecp256k1Behavior::new();
+
+        let create_mock_secret_key = || {
+            let mut mock_keypair = MockKeypairBehavior::new();
+            let mut mock_secret_key = MockSecretKeyBehavior::<
+                MockKeypairBehavior<MockSecp256k1Behavior>,
+                MockSecp256k1Behavior,
+            >::new();
+
+            // add_xonly_tweak on keypair, returns an error
+            mock_keypair
+                .expect_add_xonly_tweak()
+                .return_once(|_: &MockSecp256k1Behavior, _| Err(secp256k1::Error::InvalidTweak));
+
+            // secretKey.keypair returns an MockKeypair
+            mock_secret_key
+                .expect_keypair()
+                .return_once(move |_| mock_keypair);
+
+            mock_secret_key
+        };
+
+        let result = payout_settlement.add_prev_update_sig(
+            create_mock_secret_key(),
+            Some(&Scalar::random_custom(&mut rand::thread_rng())),
+            &mock_secp,
+        );
+
+        assert!(matches!(result, Err(UhpoError::KeypairCreationError(_))));
+    }
+}