7mins read
Published on: Oct 31, 2024
#Crypto 360
A multi-signature wallet adds a layer of security to cryptocurrency transactions by requiring more than one approval to move funds. It minimises the risk of theft, fraud, or loss of funds, making it ideal for individuals and institutions.
➔ A multi-signature wallet needs more than one private key to authorise a transaction and is more secure than a single-key wallet.
➔ Organisations and individuals use multi-signature wallets to distribute control and avoid a single point of failure.
➔ Multi-sig wallets protect from hacking, theft, and losing private keys.
➔ Often used by businesses and teams to lighten the load of handling large sums of cryptocurrency, these wallets mitigate risk with checks and balances.
➔ Increasing demand for ways to keep digital assets safe will continue to push multi-signature wallets ahead in security and user-friendliness.
When it comes to storing funds, especially cryptocurrency, security is critical. As digital assets’ value and adoption grow, so does the need to store them safely. A multi-signature wallet is a protection mechanism that involves multiple signatures to validate a transaction.
Traditionally, a single private key has been risky. Multi-signature (multi-sig) wallets solved this by asking for multiple approvals. This blog discusses what is a multi-signature wallet, how multi-signature wallets work, and why they are becoming a popular cryptocurrency storage model.
A multi-signature wallet is an application that requires two or more private keys to sign and authorise a transaction.
Think of a multi-signature wallet as a shared safe where three people each have their own key to the safe. You can’t open the safe unless you use at least two of the three keys together. The model in which such wallets work ensures that no single person can move funds without the approval of all others.
This added layer of security makes multi-signature wallets especially practical for a range of purposes, including:
► Team-based transactions: Companies use multi-signature wallets to ensure that multiple people are required to approve any transaction, reducing the chance of fraud or unauthorised withdrawals.
► Enhanced personal security: In multi-signature wallets, a single person cannot hold the private key (and therefore cannot access) the funds they deposit if the private key is lost or compromised.
► Trust in shared accounts: Such wallets work well for partnerships or group investments to ensure all parties agree before transferring funds.
Image: How multi-signature wallets work
The multi-sign wallet works in a way that a series of private keys are created when you create the wallet. Depending on the configuration, the wallet owner can choose to have more than only one of these keys to authorise a transaction. The most common setups include:
► 2-of-3 configuration: One of the most popular setups for multi-sig wallets. It means that there are a total of 3 keys, but you need 2 of them to sign any transaction. With this setup, if someone loses a key, it is still safe.
► 3-of-5 configuration: In this case, we have five keys, and at least three must be used to authorise a transaction. Such a setup could be applied to large organisations where more people tend to be involved in the approval process.
After the necessary signatures are obtained, the transaction is processed like any other transaction.
READ: Multi-Party Computation (MPC) Wallets Explained
Multi-signature wallets are important because they offer several key benefits over traditional single-signature wallets:
► Increased security: Multi-signature wallets cannot be managed by a single person—instead, they require multiple signatures. Even if one private key has been compromised, the funds cannot be stolen since the other private keys are also required.
► Shared control: Multi-signature wallets help make funding accessible to organisations. The shared responsibility enables more than one organisation’s executive to confirm the movement of funds.
► Prevention: Depending on the configuration, if someone has lost one of their keys, they can still access their funds with the other remaining keys. It also lessens the chance of permanent loss, which often happens when private keys are lost.
Multi-signature wallets are helpful in several scenarios, making them a flexible tool for individuals and organisations alike:
Businesses use multi-signature wallets to handle cryptocurrency transactions. However, in these cases, it is possible that funds will not be able to go out unless more than one team member has approved them. It also puts built-in checks and balances in place so that no one person controls all of the company’s assets.
Multi-signature wallets are also used to protect individuals from getting their funds stolen. Users can back up private keys securely by distributing them across multiple devices or sharing them with trusted family members. If a hacker compromises a device or a key, your funds remain safe because he does not hold the other keys.
Partnerships or shared accounts–including investment groups or charitable organisations that act on behalf of collective funds–often use multi-sign wallets.
Also Read: The Complete Copy Trading Checklist for Beginners
When security and, consequently, shared control are critical, it is obvious that a standard wallet cannot offer the same advantages as a multi-signature wallet. Here are some of the key benefits:
► Increased security: Since more than one key is needed, multi-signature wallets provide better security against hacks and thefts. For a hacker to access the funds, a hacker would need to compromise multiple keys.
► Accountability: Multi-signature wallets are held accountable to businesses or teams. This oversight is done by getting multiple parties to approve every transaction.
► Flexibility in configuration: Multi-sign contracts enable different setups, like 2 of 3 or 3 of 5, so that depending on the setup, you can determine how many approvals are required.
While multi-signature wallets offer several advantages, they also come with some challenges:
► Complexity: Single-signature wallets are easier to manage and set up than multi-signature wallets, which require users to generate multiple keys and decide on a transaction approval structure.
► Coordination required: If a transaction requires several people to approve it, delays happen if even one entity is unavailable.
► Not supported universally: Not all platforms or wallets for cryptocurrencies support the multi-signature functionality, which also limits their usage.
Security and trust are critical in both traditional finance and decentralised finance (DeFi). Both have the major advantages that multi-signature wallets provide. In traditional finance, they offer a net of safety for institutions and individuals by distributing ownership of assets.
In DeFi, multi-signature wallets are even more critical. Decisions on access to funds in DeFi can be shared among parties with multi-signature wallets to avoid risks. This decreases the risk of rogue actions or mistakes by a single entity, allowing users to rely more on the security and governance of multiple entities.
Because DeFi is advancing, multi-signature wallets seem to be a security measure that users and developers should adopt as a standard practice.
Anyone looking to increase their cryptocurrency's security will find multi-signature wallets useful. These wallets require multiple private keys, meaning that more than one private key is required to authorise transactions, which increases protection against theft, hacking, and loss of funds. Although they require some extra effort to set up, the added security and shared control make them a resource that will be very useful to individuals and businesses.
With the growth of cryptocurrency, the need for stores of secure crypto assets will increase as well. Also, with more and more institutions adopting cryptocurrencies, multi-signature wallets will play an even bigger role in securing assets.
As digital asset management becomes increasingly sophisticated, multi-signature wallets will likely continue to improve their level of security and user-friendliness to serve both individuals and institutions.
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A multi-signature wallet is a type of wallet that asks for signatures with several private keys instead of one.
In a multi-sig wallet, transactions must be approved by more than one person or device before proceeding.
Multi-sig wallets are secure because they require more than one approval and are ideal for shared ownership or businesses.
Yes. If the remaining keys are available, you can get your funds in a setup like 2-of-3.
Multi-sig wallets are widely used in DeFi to manage common funds in decentralised organisations.
While they are more challenging to set up than traditional wallets, most platforms provide easy-to-use tools and guides to help you through the process.
In hardware wallets, private keys are stored within the wallet, while in multi-sig wallets, they are divided into different keys within the same wallet.
Yes. Multi-signature wallets can provide added security over standard wallets, especially if you hold large amounts of assets.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
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