With the rise in digital assets, there is a dire need to secure your crypto funds and transactions with secure technology like Multisignature (Multisig) wallets to prevent vulnerability and the possibility of a hack. Multisig Wallets are a ray of hope for fortifying the DeFi ecosystem. But unfortunately, many digital wallet service providers have been unable to keep up with the demand for security, leaving users’ funds vulnerable to theft or fraud.
By implementing multisig technology, users can have greater peace of mind knowing that a robust and reliable system protects their digital assets. Recently, Ethereum co-founder Vitalik Buterin has emphasized the self-custody of funds through Multisig wallets and Social Recovery wallets to ensure the safety of funds.
So, without any further ado, let’s go straight to the topic.
What is a Multisig Wallet?
A multisig wallet, also known as a multi-signature wallet, is a cutting-edge digital wallet that offers unparalleled security for storing and transacting various digital assets, including cryptocurrencies, stablecoins, and non-fungible tokens (NFTs). Unlike traditional wallets that require only one private key to sign and execute transactions, a multi-sig wallet requires multiple private keys to authenticate and complete transactions.
The added layer of security ensures that even if one of the wallets or private-key is compromised, the wallet’s funds remain safe and secure. Simply put, a multi-sig wallet is a single locker with multiple keys to access what is locked inside.
How Does a Multisig Wallet Work?
The process to initiate a transaction with a multisig wallet follows the same steps regardless of the type of solution chosen. Simply input the transaction details into your wallet and sign it using your private key. Easy peasy, right? But here’s where things get really interesting: your transaction won’t be fully completed until all the required keys are submitted. That’s right, it’s a team effort!
So what are you waiting for? Start using a multi-sig wallet today following the steps given below to execute transactions through a multi-sig wallet.
Step 1: Set Up the Wallet
To start using a multi-signature wallet, you first need to create the wallet and add the co-signers who will have to approve any transactions.
Step 2: Create a Transaction
When you want to send cryptocurrency from your multi-signature wallet, you create a transaction in the same way as you would with a regular wallet. You will need to specify the amount you want to send, the recipient’s address, and any other details required by the wallet provider.
Step 3: Require Signatures
When creating the transaction, you also specify the number of signatures required to approve the transaction. For example, you may require two out of three co-signers to approve the transaction before it can be processed.
Step 4: Sign the Transaction
Once the transaction is created, it will be sent to all co-signers for approval. Each co-signer will need to sign the transaction using their private key. The wallet provider will then combine the signatures and check that the required number of signatures have been obtained.
Step 5: Broadcast the Transaction
Once the required number of signatures have been obtained, the transaction can be broadcast to the network and processed. The recipient’s address will receive the cryptocurrency, and the transaction will be recorded on the blockchain.
Step 6: Verify the Transaction
Each co-signer will receive a notification that the transaction has been processed. They can verify that the transaction was completed correctly and that the correct amount was sent to the correct address.
Types of Multisig Wallets
There are two terminologies used to define the types of multi-sig wallets.
1. N-of-n
N-of-n refers to the requirements of all private keys to authenticate and approve a transaction. For example, 2-of-2 multi-sig wallets require two private keys, the total number of keys to building a wallet.
2. N-of-m
N-of-m multi-sig wallets do not require all private keys but only need the threshold number of keys to execute transactions. For example, 2-of-3 muli-sig wallets only need two private keys out of three to process the transactions.
Also Read: Crypto Wallets: All You Need To Know About Their Types
How to Create MultiSig Wallet
There are three ways you can set up your multi-sig wallet and you can use any one of these.
- Hardware Wallet Paired With Blockchain-Based Platforms
- Multi-sig Service Providers
- Mobile Wallet
Follow These Simple Steps To Create a Multisig Wallet:
- Choose a cryptocurrency wallet that supports multi-sig functionality. Some popular options include Electrum, Armory, and Copay.
- Set up the wallet as usual, but ensure you enable the multi-sig feature. You will typically receive a prompt to choose how many signatures you want for a transaction (e.g., 2 out of 3).
- Add the public keys of the people/devices authorized to sign transactions. Each person/device will have a unique public key to verify their signature.
- After adding the public keys, you can create a transaction and submit it to the network. However, only after the required signatures are collected will the transaction occur.
- Upon initiating a transaction, each authorized person/device will receive a notification to review and sign the transaction. The transactions are executed and added to the blockchain only after the required signatures are collected.
It’s important to note that the specifics of creating a multi-sig wallet may vary depending on the wallet software you choose. So make sure to read the documentation or instructions carefully to ensure you are setting up the wallet correctly.
Advantages of MultiSig Wallets
One can reap given benefits from using multi-sig wallets,
- Security of Funds
Compared to hot wallets, multi-sig wallets are safer when securing transactions and digital assets.
- Accessibility
Multi-sig wallets are highly accessible as one can operate from any device, like a laptop or phone. Moreover, they can sign transactions within seconds by entering their private keys manually or inserting keys where it held.
- 2FA
Multi-sig wallet enables 2-factor authentication as more than one private key is required to execute the transaction. That means no single entity can take control of a wallet or transfer addresses in case of a cyber attack.
- Eliminates Rug Pull Activities
With the rising number of scams and fraud, multi-sig wallets can restore trust in big institutions like crypto exchanges. By splitting the private keys into different entities, these institutions can assure customers or investors that their funds are safe.
- Escrow Transactions
Multi-sig wallets can use smart contract capability to proceed with escrow transactions, enabling different parties to execute their transaction safely and securely by setting some conditions.
For example, suppose someone orders three sets of shoes from a particular brand. The escrow transactions will automatically execute once they receive the order.
Disadvantages of MultiSig Wallets
As every coin has two sides, so do multi-sig wallets.
- Complexity
Setting up and maintaining multi-sig wallets could be an ordeal for those using them for the first time. In addition, since multi-sig wallets require multiple signatures, there are more steps involved in authorizing a transaction; this can make the process more complex and increase the risk of user error.
- Higher Fees
Another major flaw in multi-sig wallets is the higher fees, as multiple signatures are required, and each signature adds to the transaction fee.
- Time-consuming
As different parties are involved in signing transactions, sometimes it could be delayed because of the unavailability of one of the participants. Also, Multisig wallets can take varying amounts of time to complete a transaction, ranging from a few hours to several days.
Factors such as the number of signatories required and geographical restrictions can influence the transaction duration and limit their use. Due to these limitations, there may be more convenient options for urgent or regular payments than multi-sig wallets.
- Recovery Funds
Multisig wallets take longer and require more coordination to recover funds compared to single-key storage. N-of-N setups also lack a backup or recovery solution in case one signer is unavailable. Choosing a third-party custodian for a multi-sig wallet poses the risk of a security breach that could have serious consequences.
Popular Multisig Wallets
Finding the best multi-sig wallet is like finding a needle in a haystack. To simplify users’ choices, here are some best multi-sig wallets.
1. Armory
Armory is one of the oldest and most highly secured multi-sig wallets allowing users to control their private keys without relying on third-party servers. Armory is an open-source wallet with cold storage and multi-signature support. However, it could be complex for newbies as it requires a local copy of the blockchain to be on the same machine.
2. Coinbase
The leading crypto exchange, Coinbase, also provides multi-sig wallets as a hosted wallet model. Instead of users, Coinbase controls the private key on behalf of users. To fortify network security and as a centralized entity, Coinbase uses real-world identity.
Regarding Multisignature “vaults,” they do not provide insurance because they cannot have complete control over your coins in that way. Instead, they offer various combinations to their multi-signature addresses.
Coinbase uses a 3-key system, consisting of a Coinbase key, a user key, and a shared key, to give you control over your funds. In addition, Coinbase allows up to three authorizers to sign a Bitcoin transaction using a 3-of-3 authorization system.
3. Electrum
The most commonly used desktop wallet is Electrum, which offers features like cold storage and multi-signature capabilities. Electrum is an open-source project released under the MIT license, which allows anyone to run a Bitcoin node using Electrum without a single point of failure.
Moreover, Electrum is the first wallet to use Simple Payment Verification (SPV), a method described by Satoshi in his whitepaper. As it only downloads the header for each block, it is faster than a web wallet yet still more secure.
Wrapping Up:
In conclusion, as cryptocurrency and DeFi continue to expand, the need for solid security measures becomes increasingly vital. Multi-sig wallets provide an extra layer of protection against cyber attacks and unauthorized access, thus making them a reliable option for safeguarding users’ funds.
By implementing multi-sig wallets, the cryptocurrency industry can enhance security standards and increase confidence among users, which can ultimately drive the growth and adoption of DeFi infrastructure. Therefore, multi-sig wallets should be considered a crucial element in the development and sustainability of the cryptocurrency ecosystem.
