Learn what a multi signature wallet is, how it functions, and why you should consider using one to protect your digital asset holdings.
What is a Multisig Wallet?
A multisig wallet is a type of digital currency wallet that can only be accessed through a combination of multiple unique signatures signed by different private keys.
It is analogous to a deposit box that has two separate locks and keys, secured by different individuals, respectively. Both individuals are required to access the box, therefore, one cannot open it without the other’s approval. This is how a 2-of-2 multisig wallet functions.
A 1-of-2 setup, on the other hand, is a lot more accessible. It has two unique private keys yet can be accessed with only one.
Multi signature systems, however, are not limited to two signatures. They could go as high as 7-of-7, possibly more. Furthermore, several permutations are supported, including 1-of-2, 2-of-3, 3-of-5, etc. The appropriate permutation would depend on the purpose of the wallet.
Multi signature wallets allow companies and other organizations to conduct business processes using digital currency while also providing an extra layer of security.
Group Decision Making
Executives and/or board of directors can collectively control company funds by creating a multisig wallet. For instance, a 7-of-10 wallet would allow each executive to own one unique private key and prohibit any member from misusing the funds. With this scheme, only unanimous decisions or, at least, decisions agreed upon by the majority, will be carried out.
An escrow payment is enabled by generating a 2-of-3 multisig wallet. For instance, John intends to hire Jamie for his writing services, but wants to ensure that the completed project is well-written. Jamie, on the other hand, simply wants to be sure he is getting paid.
Both parties decide to rely on a mutually trusted intermediary (Lucas) in case there are disputes.
Here’s what’s gonna happen. First, John deposits the payment, which would be locked up (neither user can access them alone). After Jamie submits a satisfactory written piece, both parties can use their keys to sign and complete the payment.
Lucas only needs to mediate if there is a dispute. In such a case, he will need to rely on his judgment to decide which party will he use his key to create a signature with, whether that be John or Jamie.
Two-factor authentication is a security measure where users need to provide two different verification factors to authenticate themselves and better protect their funds. By having a wallet that requires two keys to access, John is able to create a two-factor authentication tool.
If he stores each private key in two separate devices (or one or both on a deposit box), hackers won’t be able to access his funds despite knowing one of his keys. Furthermore, John does not need to limit himself to two keys. He can also utilize other variations of multisig setups, like 2-of-3, 3-of-4, or 4-of-4, etc.
Popular Multisig Wallets
Casa and Keymaster
Casa is a plug-and-play Bitcoin full node built for users who want to seamlessly run a node without the technical hurdles of setting it up. Now, it comes with Keymaster, a multisig wallet service that entrusts one of your keys to Casa for security.
Casa may provide the most convenient multisig wallet but their service comes with a price. They offer 2-of-3 multisig for $300 per year, up to $1,800 per year for 3-of-5. This solution is geared towards individuals and entities possessing large amounts of crypto assets that want the added security and peace of mind provided by the service.
This is one of the most popular bitcoin-only wallets out there. Electrum has been around for a while, and supports integration with hardware wallets as well as multisig setups.
Armory is another open-source bitcoin wallet specifically geared for tech-savvy users, and is optimal for setting up multisig for long-time cold storage on a desktop. It supports up to 7-of-7 permutations.
Using a multisig wallet incurs some risks involved, especially if you’re not using third-party services like Casa. Despite having many tutorials available online, setting up a multisig wallet still requires some technical knowledge.
For instance, if you use 2-of-2 multisig address and of the keys is lost, you’ll no longer be able to access your funds and no one can help you retrieve them.
Despite their inherent risks, multi signature wallets provide an effective solution for a range of problems, making bitcoin and other digital currencies more secure and suitable for organizations. As these currencies are slowly being adopted by businesses and other entities, the usage of multisig technology is likely to increase in the future.
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