Digital signatures provide security in online transactions by offering a way to verify the authenticity and integrity of digital messages or documents. They work by using encryption techniques to create a unique code, or signature, based on the content of the message and a private key. When the recipient receives the message, they can use the sender's public key to verify that the signature matches the content, ensuring that it hasn't been altered and confirming the identity of the sender. This mechanism builds trust and secures sensitive online communications.