multi-signature wallets

What is a multi-signature wallet and is it more secure?

17th May 2023

The term “multi-signature” or “multi-sig” refers to a particular type of digital signature that allows two or more people to sign collectively. Therefore, a multi-signature is created by merging a number of distinct signatures. Although the multisig technology has been integrated into the world of cryptocurrencies, the idea existed long before the creation of bitcoin.

Indeed, the method was first used in the context of cryptocurrency addresses in 2012. This is what ultimately led to the development of multi-sig wallets one year later. While multisig addresses are used in most situations, they are often used for security reasons. It is in fact the theoretically most secure method for protect your cryptocurrencies.

In this development, we will delve deeper into how they are used to guarantee the security of signatories.

How a Multisignature Wallet Works

For a clearer explanation, we will take the example of Ali and Anne who own a safe. The latter has two locks with two keys and each of them has a key that it keeps. So, for one of them to access the chest, they must use both of their keys at once to open it. In other words, neither can access the safe without the permission of the other.

In essence, access to cash stored on a multi-signature address requires two or more signatures. Consumers can therefore add a security level additional to their money using a multi-signature wallet.

Since 2013, multisig wallets have been available in different formats. You can specify exactly how many private keys are available and how many are needed to open the wallet when you set it up. “Two-of-three multisig” is a very common variation. 

Three distinct signatures are used in this approach, and two of them can be used to verify a transaction. The three out of five, two out of two, and five out of seven portfolios are also other typical choices.

In short, regardless of the number of keyholders, using a Multisig wallet still involves the same fundamental steps. 

Le signing process starts when one of the users decides to make a transaction using a wallet. He inserts the transactional information into his wallet and signs the transaction with his key.

This is the first step towards transaction validation, but it is not yet finished. Until all affected keys have signed the transaction, the operation remains pending. The wallet will sign the transaction only after receiving the necessary number of keys. Then the money can be sent to the correct address.

Furthermore, it is important to note that the multi-signature wallets have no hierarchy. For example, if a multi-sig wallet needs four out of five private keys to confirm a transaction, it can be carried out without a particular order.

Rather, any order can be used by at least four of the five users to sign the transaction. There is no time to finalize the transaction, and it remains pending until all necessary signatures have been provided.

The advantages of a multi-sig wallet

Multisig wallets are very popular because they offer cryptocurrency traders a number of special advantages.

✅ Better security

One of the main advantages of multi-sig wallets is the possibility of recovering funds in the event of a problem. In fact, not all signatures are required to access funds. Therefore, your money will not be blocked even if you lose one or two.

Indeed, let's say you've created a "two out of three" multi-sig wallet. Then you recorded a private key on a phone, another on a laptop and the last on paper, for example.

As soon as you need the funds and one of the signatures will be stolen or misplaced, you will still be able to access your money. In reality, this is where the main advantage of multi-sig wallets lies.

Using 2FA

The need for multiple signatures to perform operations enables two-factor authentication (2FA). In other words, even if one of your keys is stolen, the Fraudsters will nevertheless need your authorization to withdraw money from your account. 

For better security, keys can be kept private or distributed to other people. In both cases, they ensure that each transaction is thoroughly reviewed before being finalized.

✅ Reduction of risks of control by one person

Sharing wallet keys with a group of people allows them to collectively manage the funds. No one can move money individually, but everyone can view funds and make suggestions. This is very useful when deciding the direction of a business. The wallet essentially functions as a voting system, with transactions only approved by a specific percentage of users.

✅ Transaction blocking

Holding money in a escrow can be helpful during a transaction with another party. Escrow transactions primarily ensure that neither party can obtain money, goods, or services if the other party does not fulfill their end of the bargain. 

You can enter into contracts cryptocurrency based on escrow using two of the three keys. To begin, the buyer places money in the wallet to initiate transactions. Then, as soon as the seller has delivered the agreed products or services, both parties can sign to release the money. The third key will be reserved for an impartial third party. Thus, he can grant money to the buyer or the seller, depending on the circumstances.

What are the limitations and disadvantages of multi-sig wallets?

Multi-sig wallets are extremely useful, but not always appropriate. Here are some negative aspects that we can give them.

Affects transaction speed

The increase in the number of signatures required generally lengthens the duration of the transaction. There is often no problem when other signatories are available and responsive. However, things could get complicated when you are unable to contact the other parties. In these cases, transactions that normally complete in seconds can now take days.

❌ Requires technical expertise

A multi-sig wallet requires a few additional installation steps. Often you'll need to use a third-party wallet provider, which can make things a little more difficult. Also, the multi-sig wallets being relatively new, it can be difficult to explain how they work to other people. Additionally, regulations have not kept pace with advances in technology. 

Consequently, it is essential to be well informed about the functioning of wallets and make sure you follow all the steps correctly. Vigilance is especially required when building a multi-sig wallet for your business.

❌ Exposed to fraud and loss of keys

It can be dangerous to give people access to your money. Although it rarely happens, there have been cases where people have found themselves facing breach of trust issues. They built multisig wallets only to have their friends, family members or business partners steal them.

We can cite the infamous case of the Canadian exchange Quadiga where one of the founders who owned one of the keys was found deceased. The matter is somewhat complex but nevertheless the funds have never been released since the accidental death of the founder...

Likewise, some online scams also use multisig wallets. The seller usually offers a cheap cryptocurrency and then claims to provide the consumer a wallet key. However, this key is actually one of three that the multi-sig wallet has, but the buyer does not know this. The scammer then uses the other two keys that are at his level to withdraw the money as soon as the buyer makes a deposit.

What to choose between a Multisig wallet or a single key wallet?

Typically, a single key wallet is used to hold cryptos. This is what the majority of cryptocurrency holders do. This allows anyone with the corresponding private key to access the money. In this case, only one key is needed to sign transactions, and anyone in possession of the private key can move money as they please and without anyone's consent.

We can thus say that the management of a unique key address is faster and easier than managing a multi-key address. However, it has several disadvantages, particularly in terms of security. 

In other words, using a single key means that the money is only protected by a single possible point of failure. This is why thieves are always inventing new phishing scams in an attempt to rob cryptocurrency users of their money.

In addition to that, hardware wallets Single-key cryptocurrencies are also not the best choice for entities that need to manage cryptocurrencies. For example, imagine that a large company's money is held in a traditional address with a single private key associated with it. This would mean that the private key would be handed over to just one person or multiple people at once, which is obviously not the most secure method of handling things.

To do this, the best solution to all these problems lies in multisig wallets. Unlike unique keys, money held on a multisig address can only be transferred if multiple signatures are provided.

What are the multi-signature wallets that one can use?

There are several multi-sig wallets that you may already be using:

  • The bitcoin wallet BlueWallet which also allows you to manage payments in Lightning Network is a multi-signature wallet. You can create single key wallets as well as Muti-signature wallets as per your choices.
  • Wallet Key.Casa which allows you to create multi-signature wallets relatively easily. You can read our article about the Casa.keys wallet to know more.

Despite their limitations, multi-sig wallets offer several advantages to holders of bitcoins and other cryptocurrencies. They offer increased security and allow block transactions without the need for a trusted third party, requiring more than one signature to transfer money. Therefore, this technology will likely be used more frequently in the future.

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Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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