A multisig wallet is a special type of wallet to securely store Bitcoins. 3-5 signatures are usually required to access stored Bitcoin.
What is a MultiSig wallet?
Multisig wallets are wallets that provide users with extra security because they require multiple unique signatures (hence multi-signatures) to authorize and execute transactions. A traditional Bitcoin wallet – or one-sig – contains Bitcoin addresses, each with an associated private key that gives the key full control over the funds.
With a bitcoin multisignature address, you can have a Bitcoin address with three or more associated private keys, so you need two to spend the funds. The wallet’s private key gives access to the user’s funds. This proves your bitcoin ownership and is necessary to execute transactions with a public key combination. If the private key is lost, all funds are lost, and there is no way to get them back. Spreading access to your wallet across multiple keys is a more secure measure.
Multisig is not native to Bitcoin. This concept has been used in the banking sector for years and before that it has been used for thousands of years to protect the security of the crypts holding the precious relics of the saints. The monastery leader would give the monks only a partial key to gain access to the precious relics. So, not a single monk could access and possibly steal the relic.
Single-key vs. Multisig
Most Bitcoin wallets use a single signature setup. This type of setup requires only one signature to sign a transaction. A single key address is easier to manage because access to funds is faster. However, they also represent points of failure that increase security risks because hackers and bad actors can more easily access them.
One-key wallets are a great option for smaller, faster transactions – like face-to-face payments – but they’re not recommended for individuals and businesses that need to store large amounts of bitcoins. Just like cash, if you lose access to a single-key wallet, your funds are gone and there’s nothing you can do to get them back.
Multisig wallets, on the other hand, are configured in a way that requires a combination of keys from different sources to be operational – for example, 2-of-3, meaning that a transaction can only be executed if at least 2 keys out of 3 are used.
There are many variations, with a combination of signatures required to access funds and execute transactions. Some solutions require that all private keys be used to create signatures and authorize transactions for maximum security.
Multisig solutions are not new to bitcoin. This concept was first pioneered and formalized into the standard Bitcoin protocol since 2012 but only started gaining traction in 2014 after the shutdown of Silk Road and the collapse of bitcoin exchange Mt.Gox. Two adverse events urge developers to promote better ways to obtain maximum security against hacks and confiscation by the authorities.
Why use a multisig wallet?
There is a growing practice among businesses to store bitcoins as a backup asset in multisig wallets, as relying on only one person to maintain the private key can be a regrettable mistake for the security of funds. By using a multisig wallet, users can prevent problems caused by the loss or theft of private keys. So even if one of the keys is compromised, the funds are still safe.
The multiple signatures required to authorize a transaction make it more difficult for someone to steal bitcoins because they need access to all the private keys to get the funds.
Imagine an individual or business entity creating a 2-of-3 multisig address and storing each private key in a different physical location and device, such as a cell phone, laptop and tablet. If one of the locations is accessed by a bad actor, the device on it is stolen, and even if the wallet is compromised, the attackers will not be able to use the funds just using the one key they found.
In the same way, phishing and malware attacks are easier to prevent because attackers can’t do anything with a single button that works.
In addition to any malicious attack, users can still access bitcoins using the other 2 keys if they lose their private keys. The multisig wallet is truly a passport to greater peace of mind with your funds.
How does multisig wallet work?
The process to start a transaction with a multisig wallet follows the same steps regardless of the type of solution chosen. The user will enter the transaction details in the wallet and enter the private key to sign in. Transactions will be delayed and only completed – and funds sent to the correct address – if all required keys are sent.
Example:
Step 1: Connect your hardware device to your existing or new wallet;
Step 2: Wait for the wallet to recognize the hardware device and log in;
Connect other hardware and proceed as above;
Connect the third wallet and sign in as with the previous device.
Step 3: To execute a transaction you only need two of the 3 setup wallets above.
There is no hierarchy in private keys, only the numbers required to enter the transaction are in no particular order. There is no expiration date on multisig transactions, which will remain pending until all required keys are provided.
A type of multi-signature wallet
Depending on the number of private keys and signatures required to authorize a transaction, different types of multisig wallets can be used, which are highlighted below.
- 1-of-2 Signs: multisig wallets can be used to share funds between multiple users, with each party able to access the funds without requiring the other party to authorize the transaction.
- 2-of-3 Signatures: when 2 out of 3 private keys are required to authorize a transaction, the security of the wallet is increased. This type of multisig wallet is often used by cryptocurrency exchanges to secure hot wallets. They usually store one private key online and one offline, with the security company keeping a third one.
- 3-of-5 Marks: this type of custody requires two keys – ideally separated geographically – used to access funds and authorize transactions, with the third party usually being a security company key that is also needed to access funds.
- Collaborative Custody vs Self Custody: a collaborative custody solution is used when a separate company holds your funds while you control your private keys. However, they also have different private keys to access funds for better security. A self-custody solution that allows you to control all of your private keys, where you can distribute your private keys across multiple devices and convenient locations.
Advantages of Multisig Wallet
Besides the usual tips on how to protect your money – any money – online, you need to be extra careful when it comes to bitcoins because malicious actors will exploit vulnerabilities in your system to get hold of them. .
Increased Security
First, the multisig solution prevents a single point of failure so that if you lose your private key, you won’t lose your funds because you rely on secure backups of separate private keys stored on different devices and locations for easy access.
Multisig wallets ensure you are better protected from cyber attacks, making it harder for malicious actors to compromise your security which relies on multiple points of safety, making it almost impossible to compromise.
Escrow Transactions
When using a multisig wallet, you typically use an arbitrator — a trustless escrow — to complete transactions. Although this may sound like having an intermediary, in contrast to the true ethos of Bitcoin, there are some differences to consider.
Initially, this will be a voluntary choice that you make only by choosing escrow, which can be changed at any time.
Second, trust in intermediaries can be minimal because the chosen security entity cannot access funds or earn money without private key activation.
Two-Factor Authentication (2FA)
Multiple signatures act as a typical 2FA used to access various services. Unless at least one other signature authorizes the transaction, the funds cannot be accessed and used. This solution is also recognized as a 2-of-2 multisig protocol, with private keys stored on two different devices.
Cooperation between the two parties
The multisig solution is ideal for businesses because different individuals or groups can see their balances, but to access and transfer funds, they need at least two sources – two private keys – to authorize the transaction.
Disadvantages of Multisig Wallet
Although a multisig wallet is a better solution to the security problem, it could be better. They have risks and limitations, including gray areas in the legal liability of the parties in case of problems.
Transaction Speed
Because it relies on multiple parties to authorize transactions, one of the important drawbacks of multisig wallets is the low transaction speed. The problem is easily solved if users keep the funds needed for quick transactions in a faster solution like a one-button hot wallet and leave most of their bitcoin holdings that need to be better protected in a multisig wallet.
Technical Knowledge
Although there are many educational materials online to help you acquire the right skills for a smooth multisig experience, many people are intimidated by the technical knowledge required to manage a multisig solution. Bitcoin custodian companies that offer multisig wallets are usually very proactive in helping their customers set up their solutions quickly and effectively.
Recovery and Custodial Fund
Recovering funds in a multisig wallet can be tedious and scary for non-technical bitcoiners, as it requires importing each recovery phrase on each different device, which can be a challenge for the most technically skilled users. However, this should not deter people from using multisig as the prospect of losing funds more easily than a one-button solution is more daunting.
Final Words
While multisig is a great way to protect your bitcoins and provide a sense of security and peace of mind, it could be better. You need to understand bitcoin and wallets thoroughly before taking the next step to buy your own multisig. You can find the best multisig wallet guide for your research.
If you can’t set up a multisig wallet and learn the necessary technicalities, multisig can help you gain peace of mind with bitcoin by adding an extra layer of security to your holdings.
With an overall figure of approximately 4 million bitcoins forever lost due to hacking, malicious attacks and poor personal maintenance, it is more important than ever to protect your funds with the right tools and knowledge. Despite some drawbacks, multisig wallets offer a reasonable solution for businesses and individuals by requiring more than one signature to access and transfer funds.
The technology behind multisig has improved significantly since its initial use and is likely to increase its applications in the future, especially considering that the risk of hacks and loss of funds are some of the issues that prevent people from investing in bitcoin. With better security, more adoption will follow.
Whether you should use a multisig solution depends on your needs and preferences. If you are not comfortable, slow transactions and technical requirements put you off, then a multisig wallet might not be for you. However, individuals, groups, companies and institutions with funds that cannot be lost, should use multisig without hesitation for advanced security.