Multisig Wallets: Everything to Know
By Beluga Research June 17, 2023
- A multisig wallet is a type of cryptocurrency wallet that requires multiple signatures or approvals to complete a transaction
- This provides an extra layer of security for users as it requires more than one entity to approve movement of funds
- The requirement of multiple signatures is a standard feature of some cryptocurrency wallets
- A multisig wallet helps to guard against theft and loss of funds
A multisignature wallet, also known as a multisig wallet, is a type of cryptocurrency wallet that requires multiple signatures or approvals to complete a transaction. This type of wallet is more secure than a traditional wallet, which only requires a single signature to authorize a transaction. A user sets up a multisig wallet by generating multiple private keys, which are like passwords for a crypto wallet.
A Brief History
Early Bitcoin developer Gavin Andresen first introduced multisignature wallets in 2012. The concept was implemented to increase the security of Bitcoin transactions by requiring multiple signatures to authorize a transaction. The requirement for multiple signatures is now a standard feature for many cryptocurrency wallets.
What Is a Multisig Wallet?
A multisig wallet requires multiple parties like individuals or organizations to approve of a transaction. The number of signatures required varies depending on the wallet and preferences of the user.
For example, a 2-of-3 multisig wallet requires two out of three parties to approve a transaction. If one of the parties is compromised, the transaction could be blocked. Two of the three signatures are still required. A 3-of-5 multisig wallet requires three of five parties to approve a transaction, increasing the level of security even further.
A multisig wallet can be used for a variety of purposes, including joint accounts, corporate accounts, and escrow services. It can also be used to protect against theft or loss of funds. An attacker would need to compromise multiple parties to steal the funds.
- Set up using multiple private keys. The set-up of a multisig wallet depends on the type of wallet the user chooses. Generally, the user needs to generate multiple private keys. They must determine how many of those keys will be required to initiate a transaction. For example, if a user set up a 2-of-3 multisig wallet, this would require two out of three private keys to initiate the transaction.
- Distribute private keys to authorized parties. Authorized parties could be members of the user's business. They could also be trusted friends or family members. They could even be a third-party custodian. It is important to keep private keys secure. These are the keys to a person's cryptocurrency holdings.
- Use private keys to sign the transaction. For example, for a 2-of-3 multisig wallet, the user will need two out of the three private keys to sign a transaction. Once the user has obtained the required number of signatures, the transaction will be broadcast to the network and executed.
- Provides an extra layer of security. With a traditional single-signature wallet, if someone gains access to a user's private key, that party can easily initiate a single transaction and steal a user's funds. A multisig wallet makes it more difficult, if not impossible, for a malicious actor to steal a user's funds. Stealing from a multisig wallet requires gaining access to several users' private keys.
- Shared control of funds. For example, a user who is part of a business or investment group can use a multisig wallet to require multiple members to sign off on transactions. This can help prevent any single member from making unauthorized transactions or stealing funds.
- Escrow services. An escrow transaction involves a third party holding funds until certain conditions are met. With a multisig wallet, the third party can hold one of the private keys. The buyer and seller hold the other keys. This ensures that funds are only released after the agreed-upon conditions have been met.
- Security. A multisig wallet is more secure than a traditional single-signature wallet. It requires multiple approvals before a transaction can be executed. This reduces the risk of funds being stolen or lost due to a single point of failure like one compromised private key.
- Control. A multisig wallet gives users more control over their funds. It establishes rules as to who can approve transactions and how many approvals are required. This can be particularly useful for businesses or organizations that need to manage funds across multiple users or departments.
- Transparency. A multisig wallet can provide greater transparency than a single-signature wallet. All parties involved in a transaction must approve it before it can be executed. This can help to prevent fraudulent or unauthorized transactions. The multiple approvals also provide an audit trail for compliance purposes.
- Flexibility. A multisig wallet can be customized to meet the specific needs of a user or organization. For example, a user can set up different rules for different types of transactions. They can require more approvals for larger transactions.
- Complexity. A multisig wallet is typically more complex to set up and use than a traditional single-signature wallet. Users must understand how to set up and manage multiple keys. All of the parties that have private keys must be taught how to approve transactions using their respective key.
- Cost. A multisig wallet can be more expensive to use than a traditional single-signature wallet. The requirements of multiple keys means that it may have more transaction fees than a single-signature wallet. The higher transaction fees can be a barrier to entry for some users. This is particularly true for users with smaller amounts of cryptocurrency.
- Inconvenience. A multisig wallet can be more inconvenient to use than a traditional single-signature wallet. It requires multiple approvals for every single transaction. This can be time-consuming and impractical for users who make frequent transactions.
- Trust. A multisig wallet requires users to trust the other parties involved in approving transactions. If one of the parties is compromised or acts maliciously, funds can get lost or be stolen.