What is a Multi Signature Wallet and How multi-signature wallets work?

By Shubham Joshi

A MultiSig wallet is a digital wallet that uses multisignature addresses. This indicates that multiple private keys are required to sign and approve a crypto transaction, or in some cases, that multiple keys may be utilized to generate a signature.

This process is carried out to increase the security of the funds stored in the wallet by requiring multiple parties to approve before sending any transactions. From a security standpoint, it’s critical that coins and tokens are kept in a way that completely eliminates the risk that one weak spot may allow the entire wallet to be compromised.

Understanding The Basics Of Multi Sig Wallet

Multisig wallets, also known as multisig vaults or safes, are a type of cryptocurrency wallet which requires two or more private keys to carry out specific operations. A multisig wallet requires several signatures from a list of predetermined addresses in order to complete the transaction. If any one of these signatures is missing, the transaction will not be able to go through.

Typically, a blockchain transaction can be signed using just one private key. However, a lot of blockchains (like the one that Bitcoin is based on) permit the formation of addresses that need more than one private key for a transaction to be successfully signed. 

Multisig wallets, on the other hand, are smart contract-based wallets. These smart wallets are controlled by code and owned by their owners on-chain rather than endpoints being controlled by users. Due to this configuration, multisig wallets are regarded as a “seedless” type of self-custody.

Types of Multi Signature Wallets

Cryptocurrency wallets with multiple signatures can be identified by the number of active private keys and the number of signatures needed to approve a transaction. Here are some options that are commonly used in personal wallets and even on crypto exchanges.

• 2-of-2 MultiSig wallet

Wallets with two-factor authentication feature utilize the 2-of-2 multisignature algorithm. The goal is to store private keys on two different gadgets. For example, one private key is stored on a computer, the other on a mobile device. No transaction can be authorised without both devices signing it.

• 2-of-3 MultiSig wallet

This kind of MultiSig wallet requires two out of the three private keys to be present to authorize transactions. Exchanges frequently use them to enhance the security of their hot wallets. An exchange that supports 2-of-3 MultiSig addresses holds one private key online while keeping the other offline on a separate device. The third private key is stored by a separate security company. Private keys are held by two different organizations, so even if one of them gets hacked, the wallet is still secure.

• 1-of-2 Multisig wallet

Funds can be distributed across several users using multisig wallets. If you want to share the funds in one wallet with a trusted person, you can configure a wallet such that any of your two keys can create a signature. However, you can each use the money independently as neither of the keys is required.

Advantages of Multi Sig Wallet

• Two-factor authentication (2FA)

Multi signature wallets offer a form of two-factor authentication (2FA), because eligible signers must verify all pending transactions before acceptance. Users can quickly stop any hostile actor that obtains unauthorized access to a key linked with the object and revoke their access. 

• Cooperation between multiple parties

A multisig wallet is ideal in a corporate setting where two or more parties must approve to carry out business decisions. This is especially useful in situations like a DAO, when an increasing number of strangers come together online to work towards common goals. 

• Increased security

Multisig wallets are linked with greater security and comfort. Given the rising security concerns in the cryptocurrency industry and the irreversibility of blockchain transactions, this factor is extremely crucial.

Disadvantages of Multi Sig Wallet

• Speed of Transaction

When users decide to use a multisig wallet, they trade off speed for security. A transaction from a multisig wallet may take several hours to several days to complete, depending on the number of signatures and the location of the wallet. 

• Technical knowledge

To use multisig wallets, users need to be familiar with more than just the bare minimum of security procedures. It may be necessary to consult a third-party wallet provider during the setup process, install particular software, or buy specialized tools like many hardware wallets and safe boxes.

• Fund recovery and custodian

Recovery of funds from a multisig wallet is much more complicated and time-consuming than from a single-key wallet. However, companies that select the comparatively simpler multisig wallet housed with a third-party custodian expose themselves to counterparty risk.

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