A major concern for cryptocurrency holders is security. Security concerns often involve security protocols and the security of cryptocurrency wallets, which present significant threats to funds that may be tampered with or stolen by hackers.
One of the solutions to prevent loss is a multi-signature wallet. This article details everything you need to know about multisig wallets, including its origin, how it works, use cases as well as pros and cons.
What Is a Multi-Signature Wallet?
A multi-signature wallet ("multisig" for short) is a cryptocurrency wallet that requires two or more private keys to sign and send a transaction. This type of digital signature makes it possible for two or more users to sign documents as a group. Co-owners and signatories to a shared multisig wallet are known as "copayers."
The number of signatures required to sign a transaction is dependent on the kind of wallet. It may be lower or equal to the number of copayers of the wallet.
Multisig technology has existed within the world of cryptocurrencies, but the principle itself was around long before Bitcoin was even created.
In 2012, the technology was first introduced and applied to the Bitcoin blockchain. A year later, in 2013, the first multisig wallets created for the end-user were put on the market. Prior to that, the norm for personal users was the single key address.
How Does A Multi-Signature Wallet Work?
Multisig wallets work in similar ways to bank vaults. The technical component behind a bank vault makes it so that more than one key is required to open it. As a result, multisig wallets are often called vaults.
You can choose how many keys are allowed to open the “vault” (as well as the minimum number of keys needed to unlock it). For example, you may choose to have a 3-of-4 multisig where three out of four assigned private keys are needed.
Multisignature wallets offer additional features which non-crypto wallets offer, such as providing each copayer access and oversight over the funds and transactions of their wallets.
A unique recovery phrase is given to each copayer sharing the wallet. Copayers must keep their recovery phrase secure or risk the chance that there are not enough copayers to sign transactions.
Advantages and Disadvantages of Multi-Signature Wallets
Advantages to Multisig Wallets
There are many benefits associated with multisig wallets.
- A multi-signature wallet helps to get rid of the security concerns that come with a single private key mechanism.
- Multisig reduces the dependency on one person.
- Multisig makes cyberattacks difficult by increasing the number of potential failure points that hackers encounter.
- Multisig wallets reduce the dependency on one device. For example, Crypto users can save one private key in their mobile phone and another on their desktop or laptop device.
Disadvantages to Multisig Wallets
Despite multisig wallets being a good solution for various problems, there are still some risks and limitations to keep in mind:
- Setting up a multisig address requires technical knowledge.
- There are no legal custodians of funds deposited into a shared wallet with multiple keyholders. If something goes wrong, seeking legal help can be difficult because blockchain and multisig addresses are relatively new concepts.
- Transaction speed is often slow. The speed is impacted because multisig depends upon either a third party, device, or location to access the wallet and sign the transaction.
- The process of recovery in a multisig wallet is tedious. It requires importing each of the recovery phrases on a different device.
Multi-Signature Wallets Use Cases
Multisig addresses can be used for different circumstances, but most concern security.
1. Enhanced Security
The use of a multisig wallet enables users to create an additional layer of security for their funds. If one of the keys is compromised, the user can be assured that their funds are still safe.
Multisig technology also deters malware infections and phishing attacks due to the hacker likely only having access to a single key or device.
2. Decision Making
Imagine a business partnership between several individuals. A multisig wallet can be used to control access to their joint company funds.
They may choose to set up a 4-of-6 wallet where each individual holds one key, and none of them can misuse the funds or gain access. This means only decisions that are unanimously agreed upon by the majority will be made.
3. Escrow Transactions
A 2-of-3 multisig wallet can allow escrow transactions between two parties (A and B). The transaction also includes a third party (C) as a mutually trusted arbiter if anything goes wrong.
4. Two-Factor Authentication
Multisig is also used as a form of two-factor authentication. This is because the private keys can be stored on different devices.
However, there are risks with using multisig technology as two-factor authentication. The risks are doubled if the multisig address is set to 2-of-2 private keys. If one of the keys is lost, access to the funds will also be lost.
5. Single-Key vs. Multisig
Normally, cryptocurrencies are stored in a standard, single-key address, meaning that whoever possesses the correct private key is granted access to the funds. This means that only one key is needed to sign transactions and transfer the coins at will, without further authorization.
Although using a single-key address is faster and easier than a multisig one, it presents several issues, particularly regarding security. For example, with a single key, the funds are only protected by a single point of failure.
Cybercriminals are constantly developing new phishing techniques to steal the funds of cryptocurrency users.
Multisig Wallets Deliver Enhanced Security
Weighing the advantages and disadvantages, multi-signature wallets are a much more credible and highly secure alternative for managing crypto funds. If used properly, multisig wallets provide numerous useful applications that make Bitcoin and other cryptocurrencies more appealing, useful, and secure.
By requiring more than one signature to transfer funds, multisig wallets provide enhanced security and allow for unanimous decision-making. There is no doubt that the technology is likely to see increased usage in the future and the introduction of further useful updates.