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What Is a Multisig Wallet?

Published on
June 22, 2022
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What Is a Multisig Wallet?

On the surface, a crypto wallet does nothing. Coins or tokens are stored at an address, and their owner must issue a transaction, pay fees, and sign it to move them.

Before transferring assets to another address, most crypto wallets demand a single signature, which is sufficient for most investors. Managing just one set of public and private keys might be overwhelming for some people, so many people are astonished by multi-signature wallets.

This type of blockchain wallet, also known as a multisig wallet,' was built by developers to supply improved and customized custodian functions for crypto owners.

Because cryptocurrencies are only digital, various security issues restrict professionals such as hedge fund managers and venture capital firms from investing in crypto assets. That is why the industry requires multisig wallets, and we will explain how they function and why they are so beneficial in the following post.

What is a multisig wallet, and how does it work?

Multisig wallets, unlike traditional cryptocurrency wallets, allow many people to sign a single transaction. This structure is particularly effective when a group or corporate entity stores or owns a substantial quantity of money.

Multisig wallets, for example, would be used by a crypto firm that provides custodian services to prevent employees from going rogue or to add an extra layer of safety in the event of a hack. Multisig wallets make it more difficult for users to move funds, regardless of whether the operation is evil or not. Depending on the settings, the wallet needs a signature from all or most of its owners.

Consider the following scenario: you and your partner have a hidden safe in your home that doubles as a joint account. The safe includes two locks and two keys, and you must unlock it simultaneously with your partner's key whenever you wish to take money out of it. If both keys are missing, the safe will not open, and you will be unable to access your funds. In the same way, your partner will be unable to gain access without your key.

While these wallets are more complex than standard crypto wallets, there is no disputing that they provide an additional layer of security.

Configurations with several signatures

Multisig wallets are noted for being adaptable and able to work in various settings.

The previously mentioned configuration can also be used to create a shared account in which only one key is required to move funds. The constraints are strict once they're in place, but the wallet's configuration is virtually limitless.

If there are more than two people involved, there are configurations where a majority must approve the transaction. The most common multisig setup is maintained by three people and only requires two signatures. As an effect, even if one of the members goes missing, the wallet is still accessible.

The possibilities are unlimited, and because multi-signature wallets are decentralized, they can be configured in any way.

Multisig wallets have several benefits.

Even if you are not a business owner, there are various benefits to using multisig wallets. You might be shocked to learn that even single travelers can profit from multisigs, so let's start with the particularly appealing benefits to retail customers.

Two-factor authentication (2FA)

Before login into their accounts, holders of crypto exchange accounts must typically enter a 2FA code.

Two-factor authentication is a means of gaining access to funds that requires two keys. After logging in, most online platforms already use this concept by requiring users to enter a secret code texted to their smartphone.

In the case of crypto, investors can employ a similar strategy. For example, you can use a mobile and desktop wallet to sign transactions. The funds will flow once both devices have validated the transaction.

Use caution when acting. The disadvantage of two-factor authentication is that if one of the two devices is lost, you will be unable to relocate your crypto investments.

Security

The most significant advantage of multisig wallets is security. By storing their crypto in a multisig wallet, users can ensure their assets' safety at all times and avoid thefts or hacks.

A user who uses a two-of-three-keys arrangement and is infected with malware on one device cannot lose money. Without access to at least one additional device, the hacker will be unable to take any assets.

Another advantage is that if a user loses or smashes a device by mistake, the funds can still be transferred using the two other devices.

Consensus

Multisig wallets allow for collective consensus, particularly significant in group settings.

An investment group with six board members, for example, can set up a 4-of-6 key arrangement in which each member has a single key. If the group decides to sell assets to another user, the decision will only be carried out if the majority approves.

Escrow transactions

The 2-of-3 key setup comes in handy once more for escrow transactions. Here's an example of how users can use the blockchain to make escrow-like transactions:

If Brad and Angelina want to trade, they can enlist the help of Ashley, a mutually trusted third party.

If the contract is that Brad deposits funds into the wallet and Angelina sends Brad a real object in exchange, they will sign the transaction when it is finished. If a difficulty arises (such as Angelina refusing to send the merchandise as agreed), Ashley can step in and submit his signature, allowing Brad to reclaim her deposited funds.

Conclusion

Although it is frequently stated that blockchain wallets are complicated enough, every expert understands that adding complexity to an already favorable business may only add to its benefits.

Multisig wallets were once only used by hardcore Bitcoin developers and exchange operators who were dead set on maximum security. Still, a recent focus on improving user experience has shortened the multisig setup procedure to the point where newcomers with no prior training can configure them.

Naturally, digital wallets have a variety of drawbacks that make them unsuitable for some users. On the other hand, the security benefits are sufficient to outweigh any risks. At the time, there was no better custodial security solution than multisig wallets.