What is a multisig wallet? A multisig (multi-signature) wallet really is just what it sounds like, a wallet that requires multiple signatures to sign a transaction.
If you're new to cryptocurrency wallets, or just exploring the possibilities of a multisig setup, this quick guide has got you covered.
Overview:
- The basics of wallets
- What is a multisig wallet?
- Multisig wallet example use cases
The basics of wallets
It's always useful to preface any discussions relating to cryptocurrency wallets with some of the basics surrounding how they work.
When it comes to self-custody your cryptocurrency is not actually stored in your hardware wallet, rather, it is stored on its respective blockchain. Your wallet holds the keys that give you ownership over the coins that you own on that blockchain.
What makes hardware wallets such a critical security tool, is not only the ability to hold your own private keys but also the ability to sign transactions without exposing your private key to the internet. Thus, reducing the risk of anyone else getting hold of your private key and taking your crypto.
With a typical 1 signature wallet setup, you will create the transaction on your wallet's associated desktop/mobile application and you will then need to sign the transaction using your hardware wallet in order to send any funds out of your wallet. Think of this as a 1 key of 1 setup, you only need 1 private key in your 1 wallet setup in order to approve a transaction.
What is a multisig wallet
Multisig, short for multi-signature is a mechanism used to enhance the security of your digital assets. Instead of having one individual sign a transaction using their private key (as explained above) multisig can involve multiple private keys and multiple wallets. With the ability to configure the number of keys required in order to sign a transaction. This can be based on certain security parameters, the number of parties involved and many other factors.
There are of course many benefits to using a multisig setup:
- Reduces the risk of single points of failure.
- Enables private keys to be stored in different locations for improved security.
- Allows all co-signers associated with the wallet to view transaction details and wallet balances.
- Each co-signer receives a unique seed phrase. One cannot be used to regain access to all wallets involved in the multisig setup.
- Having multiple people involved in the signing of transactions increases security significantly, greatly reducing the risk of funds being lost or stolen.
When it comes to multisig wallets, there will inevitably be variations in the number of wallets involved in the multisig setup and the number of signatures required to authorise a transaction.
Multisig wallet example use cases
1 key of 2: Two parents want to invest in cryptocurrency to pay for their kids university fees. So, they set up a multisig wallet that allows them both to access the funds whilst only requiring one signature to send transactions. This is a uniquely high-trust situation between the two individuals involved.
2 keys of 2: A young investor want's to level up his self-custody security. He purchases 2 hardware wallets and stores them in 2 separate locations. This multisig setup requires him to sign transactions on both devices, think of this like 2-Factor authentication for your digital assets.
8 keys of 10: With inflation skyrocketing, a large multi-million-pound corporation decides to start holding Bitcoin in their treasury. The company has 10 directors, so they set up multisig wallets with a strong majority vote required in order to sign transactions. This prevents access from low-level employees and requires 8 private keys to sign a single transaction - a significant security measure.
Summary
Multisig is an incredibly powerful tool with a wide range of possible applications. Whilst it does require some technical knowledge, its advanced configurability makes it one of the most impressive working concepts in the cryptocurrency industry to date.
