A multisignature crypto wallet can be one of the most valuable tools for crypto enthusiasts. However, many investors have never even heard of the term before. So, what is a multisig wallet? Explore our guide to discover what it is and how it compares to a typical single-key wallet.
What Is a Multisig Wallet?
A multisignature crypto wallet, multisig for short, is a special type of crypto wallet for securely storing cryptocurrency. You can only access the cryptocurrency when two or more signatures are entered togETHer.
You can think of a multisig wallet as being somewhat like a multi-key secure deposit box. This style of box stores assets and can only be opened when multiple keys are inserted into multiple locks. The multisig wallet is essentially the digital version. The cryptocurrency is stored in a wallet, and transactions can only be made when multiple users enter their own unique signatures or keys.
Multisig wallets have been around since 2013, and they come in many forms. When you set up the wallet, you can decide exactly how many private keys are available and how many are needed to open the wallet. A common option is the "two-of-three" multisig. This style has three unique signatures, and any two of the three can be used to authenticate a transaction. Other common options include three-of-five wallets, two-of-two wallets and five-of-seven wallets.
How Does a Multisig Wallet Work?
No matter how many key holders you have, the basic process of using a multisig wallet is always the same. It starts when one user decides to make a transaction using the wallet. They input the details of their transaction in the wallet, and enter their key to sign the transaction.
However, the transaction isn’t finalized yet. It will be a pending transaction until all of the required keys sign the transaction. Once the appropriate number of keys is entered, the wallet itself signs the transaction – and sends the funds to the appropriate address.
Multisig wallets do not have a hierarchy. For example, if the multisig wallet requires four out of five private keys to validate a transaction, no specific signature is needed to finalize the transaction. Instead, any four out of the five users can sign the transaction in any order they wish. Transactions do not expire. Pending transaction proposals will remain incomplete until all required signatures are submitted.
Single-Key Wallets vs. Multisig Wallets
Multisig wallets have some key differences from standard single-key wallets. A single-key address is usually the basic mETHod for storing Bitcoin and other cryptos. Users who own coins have a single private key that they can use to access their funds and transfer them. This method can work well for private users.
However, things get more challenging when cryptocurrency is used for businesses or group efforts. There have been past instances where a company was unable to access its funds, because the only key holder was unable or unwilling to make transactions. For example, when CEO Gerry Cotten of QuadrigaCX died in December 2018, the key to over $137 million worth of crypto was lost. Using a multisig process makes it easier to keep funds accessible, and lets different employees make transactions as needed.
Though multisig wallets provide extra security and reliability, they do somewhat complicate the process. Single key users have more control over their funds. They don’t need to get permission from others to make transactions, or to deal with the extra steps associated with using their wallets.
Benefits of Using a Multisig Wallet
Multisig wallets are popular because they provide several unique advantages for crypto traders.
Increased Security
One of the main advantages of these wallets is that they provide a backup plan in case somETHing goes wrong. As long as your wallet doesn’t require all signatures to access funds, you can avoid getting locked out of it.
For example, you could create a two-of-three wallet and store one private key on your phone, one on your laptop and one on a piece of paper. In case one of your signatures is stolen or lost, you can still access your funds. Therefore, multisig wallets can be an excellent way to address security concerns.
Two-Factor Authentication
Requiring multiple signatures also provides you with a form of two-factor (2FA) authentication. If someone is able to steal one of your keys, you can still block them from taking funds out of your account. You can choose to hold onto all private keys yourself, or give them to others. Either way, it ensures that each transaction is fully verified before it’s completed.
Decision-Making
When the keys for a wallet are shared among multiple people, it allows a group to control funds togETHer. Everyone can see the funds and propose changes, but no one can transfer funds on their own. This is very popular when making business decisions. The wallet essentially acts as a form of voting in which transactions only go through when a certain majority of users agree on the transaction.
Escrowed Transactions
When you’re conducting transactions with another party, holding funds in escrow can be helpful. Escrowed transactions essentially guarantee that neither party can receive funds, services or products without the other party holding up their end of the deal. Two-of-three wallets allow you to perform escrowed contracts with crypto.
These transactions start with the payer depositing their funds in the wallet. Once the other party provides the agreed-upon goods or services, both parties can sign the wallet to transfer the funds to the seller. In case of disputes, there’s an unbiased third party with a key who can award the funds to the seller or buyer as needed.
Risks of Using a Multisig Wallet
Though multisig wallets are quite useful, they don't work well in every situation. There are some potential downsides.
Transaction Speed
Adding the extra signature requirements tends to slightly extend the length of a transaction. If you can communicate with the other key holders and coordinate a transaction, it doesn't necessarily take too much time. However, when you can’t get a hold of another member, things get trickier. Transactions that would have otherwise been over in a few seconds may end up taking days.
Technical Knowledge
Setting up a multisig wallet will require a few additional steps. You often have to work through a third-party wallet provider, who may complicate the process somewhat. Since multisig wallets are only a few years old, it can be hard to explain to others how they work – and legal regulations haven't quite caught up with the new technology yet. Especially when creating a multisig wallet for your business, it’s important to carefully research how the wallets work, and to make sure you do everything correctly.
Scams
Allowing others to access your funds can be risky. Though rare, there have been instances of people setting up a multisig wallet, and then having their friends, family or business associates take the money.
Multisig wallets are also involved in some common types of online scams. The typical multisig scam starts with a seller offering cheap crypto, and then saying they'll send the key for the wallet to the purchaser. Unbeknownst to the purchaser, the wallet is actually a one-of-two multisig wallet, and the scammer removes the money from the wallet once the victim pays.
Closing Thoughts
A multisignature crypto wallet requires you to input multiple private keys before making any crypto transactions. This process can help to address security concerns, and make it easier for groups of people to fairly control funds. Now that you know what is a multisig wallet, if you can learn how to use these wallets and don't need lightning-fast transactions, they can be a very useful way to manage your crypto funds.
