What is Multisig Wallet?

Multisig Wallet refers to multi-signature, which is a special type of digital signature that enables two or more users to sign documents as a group. That is, a multi-signature is created by the combination of more than one unique signature. Multisig technology is used within the cryptocurrency world, but the underlying idea predates the creation of Bitcoin.

In the context of cryptocurrencies, the technology was first applied to Bitcoin addresses in 2012. And it ultimately led to the creation of multisig wallets a year later. Multisig addresses can be used in different contexts. But most uses are associated with security concerns. This article will focus on their use in cryptocurrency wallets.

How does it work Multisig Wallet?

As a simple analogy, we can think of a safe with two locks and two keys. One key is in Alice and one is in Bob. The only way they can open the safe is if both keys are present at the same time. So one cannot open the safe by himself without the permission of the other.

Simply put, coins stored in multi-signature addresses can only be accessed with 2 or more signatures. So the use of mutisig wallets allows users to create an additional layer of security around their money. But before we go any further, it’s important to understand the basics of standard Bitcoin addresses using single keys instead of multiple.

Single and multi key comparison

Usually Bitcoins are stored in standard single-key addresses. In other words, whoever has the key corresponding to the address also has the right to access the money. This means that only one key is needed to sign trades, and anyone with a private key can transfer coins without anyone else’s consent.

Although a single key address is faster and easier to handle than multi-keys. These types of addresses create various problems, especially security. With a single key, coins are protected with a single point of failure. and that’s why cybercriminals are constantly trying to steal the accounts of crypto users by developing new phishing techniques.

Moreover, single-key addresses are not the best choice for businesses using cryptocurrencies. Imagine a large company’s capital is held at a standard address with a single matching private key. This means that the private key will be entrusted to one person or given to more than one person at the same time. This is also not very safe.

Using multisig wallets provides a potential solution to both of these problems. Unlike single keys, coins held in multisig addresses can only be moved if multiple signatures are provided (thanks to the use of different private keys).

Moreover, single-key addresses are not the best choice for businesses using cryptocurrencies. Imagine a large company’s capital is held at a standard address with a single matching private key. This means that the private key will be entrusted to one person or given to more than one person at the same time. This is also not very safe.

Depending on the multisig address configuration, it may require a combination of different numbers of keys: 2 out of 3 are most commonly used, where only 2 signatures are sufficient to access the account of the 3-signed address. But there are many other variations, such as 2 out of 2, 3 out of 3 or 3 out of 4.

This technology has several possible uses. Some of the most common uses for multi-signature cryptocurrency wallets include:

Increasing security

By using a multisig wallet, users can avoid problems caused by the loss or theft of the private key. Even if a key is lost, the account remains secure.

Imagine that Alice creates 2 of 3 multisig addresses and stores each private key in a different location or device (cell phone, laptop or tablet). Even if the mobile phone is stolen, the thief cannot access Alice’s accounts using 1 of the 3 keys. Similarly, phishing attacks and malware are less likely to succeed. Because the hacker can probably only access one device and hence a key.

Malicious attacks aside, if Alice loses one of his private keys, he can still access his account using the other two.

Two-step verification

Alice can create a two-factor authentication mechanism for accessing her account by creating a multisig wallet that requires two keys. For example, he can keep one of his private keys in his laptop and the other in his cell phone (or even on a piece of paper). In this case, it is guaranteed that only someone with both keys can transact.

However, using multisig technology as two-factor authentication can also be dangerous. Especially if 2 out of 2 are multisig addresses. If one of the keys is lost, you will not be able to access your account. Therefore, it may be safer to use the 2 of 3 scheme or to use a third party 2FA service that works with backup codes. For exchange accounts, it is highly recommended to use Google Authenticator.

Escrow transactions

Creating a 2 of 3 multisig wallet allows for an escrow transaction between two parties (Alice and Bob) with a third party (Charlie) as a jointly trusted arbitrator in case something goes wrong.

In such a scenario, Alice deposits the money first. And this money is locked (neither users can access this money on their own). Later, when Bob delivers the agreed product or service, both use their own keys to sign and complete the money transfer.

Charlie is only involved as an arbitrator if there is a disagreement. And as a result of its evaluation, it uses its own key to create a signature that Alice or Bob can use.

To decide

Also, the board of directors can use multisig wallets to control access to the company’s accounts. For example, by setting up 4 out of 6 wallets, each board member gets a single key. And none of them can use the account for their own benefit. Therefore, only decisions that are agreed upon by the majority can be implemented.

Disadvantages

Although using multisig wallets provides successful solutions for various problems, it should be noted that there are some risks and limitations. Setting up a multisig address requires some technical knowledge, especially if third party providers are not to be used.

In addition, because blockchain and multisig addresses are relatively new, it can be difficult to seek legal help if something goes wrong. There is no legal responsibility for accounts stored in shared wallets with multiple key holders.

Result

Despite a few drawbacks, Multisig wallets have a number of interesting applications. It makes Bitcoin and other cryptocurrencies much more useful and interesting, especially for businesses. Multisig wallets provide a higher level of security by requiring multiple signatures to transfer funds in the account. And it makes it possible to conduct escrow transactions that are not based on trust. It is very likely that the use of this technology will increase in the future.

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