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A Multisignature wallet (or Multisig wallet) is one where you need control over multiple private keys to spend from that wallet. That is, each address in the wallet has numerous private keys behind it. The idea with multi-sig wallets is that multiple people can cooperatively control the funds in the wallet. Alternatively, the wallet can require approval from various devices owned by the same person, i.e., a form of second-factor authentication.
According to bitcoin.com, “Multi-signatures can also be used for redundancy to protect against loss – with a 2-of-3 address, not only does theft require obtaining 2 different keys, but you can still use the coins if you forget any single key. This allows for more flexible options than just backups.
With the primary principle of n-of-m signatures, i.e., where n<m, a new layer of security and accountability can be added to a pre-existing form of digital and physical exchanges and processes. With multi-signature technology, a group can increase spending or use funds and ultimately increase participant accountability.
Firstly, multi-sigs significantly increase the difficulty of stealing or manipulating linked assets. This is because the greater the number of n, the higher it is to use the number of people. For instance, with a 2-of-2 address linked into a multi-sig transaction, a person has to keep the two keys on separate machines or used by different entities and ensure both are used for all transactions linked to the asset. This makes theft and manipulation difficult as it will require compromising both signatures. In theory, multi-signature technology differs from paper-based financial agreements that may require more than one signature.
A single-key address is not usually the best option for entities with multiple stakeholders involved with cryptocurrencies. For example, imagine a big company’s funds being stored on a standard address with a single corresponding private key. This would imply that the private key would be either entrusted to a single person or multiple individuals simultaneously, which is not the safest way to go.
Multisig wallets offer a potential solution to both of these problems. Unlike single-key, the funds stored on a multi-sig address can only be moved if multiple signatures are provided (generated using different private keys).
Some examples of Multi Signatures in real life
- Say a company desires to set up a Bitcoin wallet accessible by 3 of its employees but requires 2 to be involved in any transaction exceeding $5,000. It creates a 2-of-3 multi-sig address where it holds one key, and an outside policy enforcer holds another. This process increases accountability and transparency among the employees responsible for maintaining the company’s transactions and balances.
- In traditional finance, a custodian is a trusted third party who holds assets on behalf of another. It’sHowever, important to note that there is no longer always a clear custodian of funds with Bitcoin. In a 3-of-3 multi-sig wallet where Bank of America, JP Morgan, and State Street each hold one key, final custody lies only with the blockchain, which is decentralized itself. Consequently, lawmakers and regulators must understand this new paradigm to adapt existing regulations and create new ones.
- A board of directors might use a multi-sig wallet to control access to a company’s funds. For example, by setting up a 4-of-6 wallet where each board member holds one key, no individual board member can misuse the funds. Therefore, only decisions that are agreed upon by the majority can be executed.
To help our readers choose the best applications that help construct a Multisig wallet, we have outlined them in a small list below.
Best Multi-Sig Wallets in the Business
Copay is a wallet released by BitPay, an industry leader in wallet technology. CoPay is the original secured and trusted wallet for Bitcoin and Bitcoin Cash, which recently also included Ethereum and XRP. It uses the lightning network on the back end and is traditionally known for nominal fees, protecting it from the Bitcoin community’s fee fluctuation.
CoPay also allows its users to have Multisig wallets with different private keys for no additional resource. Moreover, it is an open-source feature that anyone can audit for flaws. Constructing a Multisig wallet is relatively simple than other wallet providers, but that should not say that the users should not have a little technical knowledge.
BitGo is the first wallet provider in the industry to claim Multisig functionality across 200 cryptocurrencies and blockchains. BitGo is the market leader in institutional cryptocurrency financial services, providing clients with security, compliance, and custodial solutions. BitGo is the world’s largest processor of on-chain bitcoin transactions, processing 15% of all global Bitcoin transactions in late 2018.
“When you sign up and create a wallet, it deploys a multi-sig contract onto the Ethereum blockchain,” said, Ben Chan, the CTO of BitGo.
Anytime a Multisig wallet is created, it forms an irrefutable contract on the Ethereum Blockchain, cementing the record.
BitGo also innovated in the Multisig sphere by releasing Multiparty Computation or MPC, which rehires the signature of various parties involved in a Multisig transaction and requires them to compute the transaction fully verified. This innovation was highly praised in the industry and is considered the new standard in Multisig technology.
One of the oldest players in the industry, Electrum, was formed in 2011 as a Bitcoin wallet provider. It was released under the MIT patent license to show its backing. Electrum has since added functionality for desktops, mobile phones, and hard wallets. For now, Electrum stresses the importance of Bitcoin and only provides services on the Bitcoin blockchain.
The Electrum Multisig feature has been used by individuals and entities for half a decade and has shown a deterring resilience towards bad actors’ threats.
Electrum also allows cross-platform linking by allowing Multisig contracts from other platforms, such as Copay, to be integrated into their platform and vice versa.
The multi-sig vault, issued by Coinbase, is created by intelligently distributing three keys, two of which are required to unlock your funds. Coinbase, acting as a mediator and the third party securely stores one key, asks you to keep a backup user key, and both Coinbase and you store a third encrypted key, which can only be unlocked with a password you know. Because Coinbase never learns your password and user key, Coinbase never gains access to your funds.
The multi-sig vault is designed to give you 100% control of your funds, with a balance of security and ease-of-use. You control the private keys which allow you access to your funds, yet you can easily spend your funds simply by entering a password.” – says the official Coinbase Blog, on the capabilities of the Multisig wallet.
Even though third-party reliance is often discouraged by the industry, several entities still rely on Coinbase as a safeguard against misplacement. Coinbase promises utmost secrecy regarding storage, and as its reputation is relatively high, scores of individuals trust Coinbase to act diligently.