Consider how a joint bank account works: both partners must be present for the account to be opened, and any transaction must be signed by both parties before it can be executed. Multisig wallets are essentially the same thing.
Cryptocurrency wallets, like single signature (also known as "basic"), require one signature to sign a transaction.
Multisig is an abbreviation for multi-signature wallet, and as the name implies, this type of wallet requires more than one private key to sign and authorize a crypto transaction, or in other situations, several separate keys can be used to establish a signature.
A multisig wallet is a digital wallet that is shared by two or more copayers. Depending on the type of wallet, the number of signatures necessary to sign a transaction will be less than or equal to the wallet's copayers.
Types of MultiSig wallets that are often used include:
- n-of-n: Transactions require the authorization of more than one key. To create the signature, all keys must be used. (2-of-2, 3-of-3, and so on).
The 2-of-2 multisignature technique is used in wallets protected by the two-factor authentication feature. The plan is to keep private keys on two different devices. One private key, for example, is kept on a computer, while the other is kept on a mobile device. Transactions cannot be approved until both devices sign. The 2-of-2 MultiSig wallet improves security, but you risk losing access to your cash if one of the devices is compromised.
- n-of-m: Transactions require some of the keys to be permitted, but not necessarily all of them (1-of-2, 2-of-3, 3-of-5, etc.).
Exchanges frequently employ them to improve the security of their hot wallets. An exchange that supports 2-of-3 MultiSig addresses retains one private key online and the other offline on a separate device (often referred to as a "paper" backup). A third private key is kept by a separate security firm. Because private keys are held by two independent entities, if one of them is compromised, the wallet remains secure.The offline backup also protects the hot wallet in the event that the security partner goes out of business.
How does a multisignature crypto wallet work?
Consider a bank vault that requires the use of more than one key to open: That is a basic explanation of how multisignature cryptocurrency wallets function (and why multisignature wallets are typically called vaults).
You can choose how many keys are permitted to open the vault and the minimum number of keys required to unlock it.
Here's an illustration of how it works:
Three persons create a multisignature crypto wallet, each with one key, and two of the three keys must be present in order to send a transaction. To make a payment, Person 1 would initiate a transaction and sign it with his key before sending it to Person 2, who would sign it with her key. Person 2 can then either send it back to Person 1 to complete the transaction or send it to Person 3 for him to sign as well (though this last step is not necessary, considering only two of the three keys are needed to unlock the wallet).
Features of multisig wallets
- All copayers can see the wallet's funds and transactions.
- To send funds from the wallet, one or more copayers must sign a transaction. This function increases the security of your funds.
- A distinct recovery phrase for each copayer that shares the wallet. If one of the copayers' recovery phrases is lost, there may be insufficient copayers to sign transactions. You will be unable to spend the wallet's funds if there are insufficient copayers to sign transactions.
Should I use multisig wallets?
Advocates of multisignature say that it is the most secure and fail-safe method of storing cryptocurrency. Even if a thief obtains one of your wallets, they will not be able to access your account until they also have the keys to the other wallets in the setup.
Others, however, claim that the multisignature user experience is not simple enough for normal users, and that only those who truly understand what they're doing should bother with it.
In addition, each single-signature wallet has a seed phrase that allows users to back up and recover their wallets. A multisig wallet, on the other hand, does not have this backup mechanism by design. So, if you lose the bulk of wallets in a multisig and their seed phrases, you lose access to the entire vault (of course, the same could be said for losing the device and seed phrase for a single-signature wallet).
This is a brief introduction to multisignature wallets. I hope you found it enlightening.
Till I come your way again,
Adios