A multisig wallet is a special type of wallet for securely storing your Bitcoin. 3-5 signatures are typically required to access the stored Bitcoin.
What is a MultiSig wallet?
A multisig wallet is a wallet that provides users with extra security because it requires multiple unique signatures (hence multi-signature) to authorize and execute a transaction. A traditional — or single-sig — Bitcoin wallet contains a Bitcoin address, each with one associated private key that grants the keyholder complete control over the funds.
With bitcoin multisignature addresses, you can have a Bitcoin address with three or more associated private keys, such that you need any two of them to spend the funds. A wallet’s private key grants access to a user’s funds. It proves ownership of your bitcoin and is necessary to execute transactions in combination with a public key. If a private key is lost, all funds are lost, and there is no way to recover them. Spreading access to a wallet across multiple keys is a safer measure.
Multisig is not native to Bitcoin. The concept has been used in the banking sector for years and previous to that it had been used for thousands of years to protect the security of crypts holding the precious relics of saints. The superior of a monastery would give monks only partial keys for gaining access to the precious relics. Thus, no single monk could gain access to and possibly steal the relics.
Single-key vs Multisig
Most Bitcoin wallets use a single signature setup. This type of setup only requires one signature to sign a transaction. Single-key addresses are easier to manage as access to funds is faster. Still, they also represent a single point of failure increasing risks for your security since hackers and malicious actors could more easily access them.
Single-key wallets are good options for small and faster transactions — like face-to-face payments — but are not recommended for individuals and businesses who need to store considerable amounts of bitcoin. Like with cash, if you lose access to your single-key wallet, your funds are gone and there’s nothing you can do to recover them.
A multisig wallet, on the other hand, is configured in a way that requires a combination of keys from different sources to be operational — for example, 2-of-3, meaning that transactions can only be executed if at least 2 keys out of 3 are used.
Different variations exist, with a combination of signatures required to access funds and execute transactions. Some solutions demand that all the private keys are used to create the signature and authorize a transaction for maximum security.
Multisig solutions are not new to bitcoin. The concept was first pioneered and formalized into the standard Bitcoin protocol as early as 2012 but only started getting traction in 2014 after the shutdown of the Silk Road and the collapse of the bitcoin exchange Mt.Gox. The two adverse events urged developers to promote a better way to obtain maximum security against hacks and confiscation by authorities.
Why use a multisig wallet?
There is an increasing practice among businesses to store their bitcoin as a reserve asset in multisig wallets, as solely relying on one person to preserve the private key could turn out to be a regrettable mistake for the security of the funds. By using a multisig wallet, users can prevent the problems caused by the loss or theft of a private key. So even if one of the keys is compromised, the funds are still safe.
Multiple signatures required to authorize a transaction make it more difficult for someone to steal your bitcoin since they would need access to all of your private keys to get hold of your funds.
Imagine any individual or business entity creating a 2-of-3 multisig address and storing each private key in a different physical place and device, like a mobile phone, a laptop and a tablet. If one of the locations is accessed by malicious actors, the device located there is stolen, and even if the wallet is compromised, the attackers won’t be able to spend the funds using only that one key they found.
In the same way, phishing and malware attacks are more easily prevented because the attackers can’t do much with one single key at their disposal.
Besides malicious attacks of any nature, users can still access their bitcoin using their other 2 keys if they lose their private key. Multisig wallets are indeed a passport to more peace of mind with your funds.
How does a multisig wallet work?
The process to initiate a transaction with a multisig wallet follows the same steps regardless of the type of solution chosen. The user will input the transaction’s details in the wallet and enter their private key to sign it. The transaction will be pending and only finalized — and the funds sent to the correct address — once all the required keys are submitted.
Example:
Step 1: Connect the hardware device to an existing wallet or create a new one;
Step 2: Wait for the wallet to recognize the hardware device and sign;
Connect a second hardware and proceed as above;
Connect the third wallet and sign as with the previous devices.
Step 3: To execute a transaction you will only need two of the 3 setup wallets above.
There’s no hierarchy in the private keys, only the number required to sign the transaction in no particular order matters. There is no expiration date in multisig transactions, which will remain pending until all the required keys are provided.
Types of multi-signature wallets
Depending on the number of private keys and signatures required to authorize a transaction, different types of multisig wallets can serve the purpose, which are highlighted below.
- 1-of-2 Signatures: multisig wallets can be used to share funds among multiple users, with each party able to access the funds without needing another party to authorize the transaction.
- 2-of-3 Signatures: when 2 out of 3 private keys are needed to authorize transactions, the wallet’s security is enhanced. This type of multisig wallet is frequently used by cryptocurrency exchanges to secure their hot wallets. They usually keep one private key online and one offline, with a security company storing the third one.
- 3-of-5 Signatures: this type of custody requires two keys — ideally geographically separated — to be used to access funds and authorize a transaction, with a third party usually being a security company’s key that is also necessary to access the funds.
- Collaborative Custody vs Self Custody: a collaborative custody solution is used when a separate company keeps custody of your funds while leaving you control over your private keys. However, they also possess a different private key to access the funds for enhanced security. A self custody solution that allows you to control all of your private keys, where you can spread the private keys across different devices and locations as you see fit.
Advantages of Multisig Wallets
Besides regular tips on how to protect your money — any money — online, you should use more precaution when it comes to bitcoin because malicious actors will exploit any vulnerability in your system to get hold of it. .
Increased Security
Firstly, multisig solutions prevent a single point of failure from occurring so that if you lose your private key, you won’t lose your funds because you rely on a safe backup of separate private keys stored on different devices and locations for easy access.
Multisig wallets ensure you are more protected from cyber-attacks, making it much harder for malicious actors to break your security that relies on multiple safety points, making them nearly impossible to compromise.
Escrow Transactions
When using a multisig wallet, you’re basically using an arbitrator — a trustless escrow — to finalize transactions. Although this may sound like having an intermediary, in contrast with Bitcoin's true ethos, there are a few differences to consider.
Firstly, this would be a voluntary choice that you make only by personally picking the escrow, which can be changed every time.
Secondly, the trust in the intermediary can be minimal as the chosen security entity cannot access your funds or get hold of them without your private key activation.
Two-Factor Authentication (2FA)
Multiple signatures act as the typical 2FA we use to access different services. Unless at least another signature authorizes the transaction, the funds cannot be accessed and spent. This solution is also recognized as a 2-of-2 multisig protocol, with the private keys kept on two different devices.
Co-operation between two parties
Multisig solutions are ideal for businesses because different individuals or groups can view balances, but to access and transfer the funds, they’ll need at least two sources — two private keys — to authorize the transactions.
Disadvantages of Multisig Wallets
Although multisig wallets represent an improved solution to security issues, they could be better. They have risks and limitations, including a gray area in the parties' legal responsibility in case something goes wrong.
Transaction Speed
Due to the reliance on multiple parties to authorize a transaction, one of the multisig wallets' crucial drawbacks is low transaction speed. Such an issue is easily overcome if a user keeps the funds needed for quick transactions in faster solutions like single-key hot wallets and leaves most of the bitcoin holdings that must be better protected in multisig wallets.
Technical Knowledge
Although there is plenty of educational material online to help you acquire the right skills for a smooth multisig experience, many people are intimidated by the technical knowledge required to configure a multisig solution. Bitcoin custodial companies that offer multisig wallets are usually very proactive in helping their customers set up their solutions quickly and effectively.
Fund Recovery and Custodial
Recovery of funds in multisig wallets might be tedious and intimidating for non-techie bitcoiners, as it requires the import of each recovery phrase on each different device, which may represent a challenge to even the most technically skilled users. However, this shouldn’t discourage people from using multisig as the prospect of losing their funds more easily from a single-key solution is more daunting.
Final Words
While multisig is a great way to protect your bitcoin and provides a greater sense of security and peace of mind, it could be better. You should understand bitcoin and wallets thoroughly before taking this next step of purchasing your own multisig. You may find our best multisig wallets guide helpful in your research.
If you get past the inconvenience of setting up a multisig wallet and the technical learning required, multisig can help you achieve greater peace of mind with your bitcoin by adding an extra layer of security to your holdings.
With an overall figure of roughly 4 million bitcoin forever lost to hacks, malicious attacks and poor personal maintenance, it is more important than ever to protect your funds with the proper tools and knowledge. Despite a few disadvantages, multisig wallets offer reasonable solutions to businesses and individuals by requiring more than one signature to access and transfer funds.
The technology behind multisig has improved massively since its early usage and will likely see an increased application in the future, especially considering that risks of hacks and loss of funds are some of the issues that discourage people from investing in bitcoin. With better security, more adoption is likely to follow.
Whether or not you should be using multisig solutions depends on your needs and preferences. If a little inconvenience, slow transactions and technical requirements put you off, then a multisig wallet might not suit you. However, individuals, groups, companies and institutions that possess funds they can’t afford to lose, should use multisig without hesitation for advanced security.
Source: Bitcoin Magazine - Bitcoin News, Articles and Expert Insights