Most cryptocurrency wallets are single-signature, which means it only needs one person to sign off on a transaction. While this may be fine for individual wallets, corporate or organization wallets may take on too much risk by solely depending on one person – thus the need for multisig wallets.
What are multisig wallets? Read on to find out!
What Is A Multisig Wallet?
Multisig stands for multi-signature – this refers to wallets that need more than one signature to sign off on a transaction. Different from single-signature wallets, two or more people need to provide their keys on multisig wallets so a transaction can be processed.
The multiple-key approach to signing off on things isn’t a new concept. The two-man rule has been used in many fields like aviation, cold storage, bank vaults, and even nuclear weapon launches. In the crypto world, the two-man rule first came into play in 2012, leading to the development of multisig wallets in 2013.
How Does A Multisig Wallet Work?
How multi-signature wallets work is rather simple. Imagine there’s a safe deposit box with three locks and three keys held by three different people. This safe deposit box can only open when all three people put their keys in the corresponding locks, meaning that all of the parties need to agree on opening the lockbox. If one of them disagrees, then the box won’t open. This is how a basic multisig wallet works.
However, there are different configurations to this storage method, usually denoted with numbers like 2-2, 2-3, 3-3, and so forth. Our example represents a 3-3 multisig wallet, where all keyholders are needed to open the box. There is also a common 2-of-3 multisig arrangement, where any two of the three aforementioned people can open the box.
The 2-3 or similar majority key requirement is usually implemented to prevent the wallet from being inaccessible. In a 3-3 wallet configuration, the entire wallet will be rendered inaccessible if one person loses their key. The majority key requirement is a good middle line because the wallet can still be opened if one person loses their key, and hackers will still have a tough time opening the wallet with just one key.
Where Are Multisig Wallets Used?
Individual investors usually don’t need multisig wallets because they’re the only ones who handle the funds. To alleviate security concerns, an individual investor should use two-factor authentication instead of a 2-of-2 wallet.
Multisig wallets are often used by:
- Crypto exchanges that use multisig wallets to secure hot wallets. The company usually places one key online, one offline, and one in a separate security company.
- Multiple retail investors who share one wallet. A 1-2 wallet means two people can use the same wallet to transfer funds and make transactions without the permission of the other.
- Business partners with a shared wallet. A 2-of-3 multisig wallet or even a 4-of-6 wallet are used in these partnerships to ensure that the majority agrees on transactions made with these wallets.
The Benefits Of Multi-Signature Wallets
Why do people use multi-signature wallets to secure their cryptocurrency? Here are several advantages offered by a multisig wallet:
The first advantage of multi-signature wallets is that it eliminates dependency on a single person or device. In single-signature wallets, if the single person in charge loses their device or is otherwise unable to access the wallet, then all of its contents will be lost.
Provides Additional Layers Of Security From Cyberattacks
A single-key wallet is more vulnerable to cyberattacks and malware infections because if a hacker gains one key, they can easily access the wallet. A multi-signature wallet has multiple keys so that even if a hacker gets one key, it’s practically useless because you need the other keys to open it.
Moreover, you can also keep the different keys in different places or entrust them to different people, so there’s no single point of failure that hackers can exploit.
Enables Democracy In Decision Making
Single-signature wallets mean that one person can make all the financial decisions regarding that wallet. Multi-signature wallets enable democracy by requiring a majority or unanimous vote every time the wallet is used, reducing instances of power abuse and misuse.
Are Multi-Signature Wallets Foolproof?
With all of these advantages, are multisig wallets foolproof? Unfortunately, they’re not. There are some caveats crypto users should know before implementing a multi-signature wallet:
- Losing the majority of keys means your wallet will be inaccessible.
- Installing the wallet usually requires a level of technical knowledge.
- Multi-signature transactions are slower because there are more parties required to sign off on them.
Multisig wallets are wallets that require multiple people to sign off on transactions. They’re typically used in exchanges and partnerships because of the increased security and democracy in financial decision-making.
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