What are Multisig Wallets?

When it comes to putting away cryptocurrency, safety is of the utmost importance. It is very important to keep the private key and seed phrase of the wallet in a safe and secure place so that no one else can get to them. But that’s not the end of it. If the attacker was able to access these details in some way, there is a means to protect the cash and stop him from transferring it. This feature is available in wallets that support multiple signatures (Multisig).

What are Multisig Wallets?

Multisig wallets, also known as multisignature wallets, are a type of digital currency storage service that necessitates the use of at least two distinct private key signatures before a transaction may be processed.

The multi-signature technology has both benefits and drawbacks, and it is not a perfect solution to all problems. Example: In October 2020, OKEx (now OKX) temporarily halted withdrawals after discovering that one of the keyholders had not been in communication with the exchange, and an investigation had been opened into the matter. Only after the owner of the key was able to authorize the transactions was the withdrawal resumed.

Using multiple signatures wisely, on the other hand, can reduce a lot of the risks that come with working with digital assets. It is imperative that we do not forget that the transactions that take place on the blockchain are irreversible. As a result, if the funds are withdrawn to an anonymous third-party wallet, it is not feasible to get them back because the wallet in question is not a bank that can do a chargeback.

How It Works

When moving money using any kind of wallet, the sender is required to “sign” the transaction. A closed key, also known as a private key, is utilized throughout this process. For a transaction to be valid when using a multisig wallet, it needs to be checked by more than one user.

The offer to complete the deal is good indefinitely. There is also no user ranking system in place. This means that any user can make an offer for other users to consider.

It is possible to categorize multi-signature wallets according to the number of private keys that are currently in use and the number of signatures that are required to validate a transaction. The following are just three of the many alternatives available (in reality, there are dozens):

• 2-2. Wallets that are guarded by a two-factor authentication system Two distinct pieces of hardware, such as a PC and a mobile phone, are used to store private keys. Before a transaction can be completed, authorization must be obtained from both devices.
• 1-2 Transaction authorization necessitates the use of two of the three existing private keys. The procedure is frequently utilized by cryptocurrency exchanges in order to secure hot wallets. One of the private keys is kept on a server that is connected to the internet; another is kept offline (sometimes known as “cold”); and the third is in the custody of a third-party custodial service.
• 1-2. You can configure your wallet in such a way that any of the two keys can generate a signature. This will make it possible for you and another person you trust to share access to the money in the same wallet.

There are numerous illustrations of the application of multi-signature. For instance, 1-2 is an excellent choice for a family consisting of a husband and wife because it only requires the signature of one of them in order to spend the money. According to scheme 2-3, it is possible to open a savings account for a kid in the name of the parent. If either of the child’s parents gives their consent, the child is free to spend the money. In general, the top two or three most popular options have a wide variety of applications in a variety of contexts (for example, trading, boards of directors, hot wallets for businesses, etc.).

The Bottom Line

We took a look at a variety of multi-signature bitcoin wallets, both general categories and specific examples, throughout this post. Key takeaways: In order for a transaction to be approved, a multisig wallet requires the signature of more than one user with their own private key. The user is responsible for determining the minimum necessary number of keys. To eliminate the possibility of a catastrophic failure being caused by a single point of failure, keys should be distributed among many storage mediums and kept by multiple individuals.

Even if a hacker manages to get his hands on one of the keys, he will still be unable to access the funds in the wallet or take them out of the wallet in any way. When deciding how to store big amounts of cryptocurrency, it is strongly recommended that you take into consideration this security alternative.