What is a multisig wallet (multisig) and how does it work?

Multisig wallet (multisig) can become 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? Check out our guide to find out what it is and see if you should use it.

What is a multisig wallet?

A multisig wallet is a special type of crypto wallet for securely storing cryptocurrencies. You can only access cryptocurrencies if two or more signatures are entered together.

A multisig wallet can be thought of as something like a multi-key safe deposit box. Such a box contains assets that can only be opened by inserting several keys into several locks. A multisig wallet is essentially a digital version. Cryptocurrency is stored in the wallet, and transactions can only be carried out after several users enter their unique signatures or keys.

Multisig wallets have been around since 2013 and they come in a variety of forms. When you set up a wallet, you can decide exactly how many private keys are available and how many are needed to open the wallet. A common variation is the two-out-of-three multisigma. This style has three unique signatures, and any two of the three can be used to authenticate a transaction. Other common options include three out of five, two out of two, and five out of seven wallets.

How does the Multisig wallet work?

No matter how many keyholders you have, the basic process for using a multisig wallet is always the same. It all starts with the fact that one of the users decides to make a transaction using a wallet. He enters the details of the transaction into the wallet and enters his key to sign the transaction. However, the transaction has not been completed yet. It will be in a pending state until all the necessary keys have signed the transaction. After entering the required number of keys, the wallet itself signs the transaction and sends the funds to the appropriate address.

Multisig wallets do not have a hierarchy. For example, if a multisig wallet requires four out of five private keys to confirm a transaction, then no special signature is required to complete the transaction. Instead, any four of the five users can sign the transaction in any order. Transactions do not expire. Transaction proposals remain pending until all required signatures have been submitted.

Single key wallets vs multi key wallets

Multisig wallets have several key differences from standard single-key wallets. A single-key address is usually the primary method of storing Bitcoin and other cryptocurrencies. Users who own coins have a single private key that they can use to access and transfer their funds. This method may work well for private users.

However, things get more complicated when cryptocurrency is used for business or group efforts. There have been cases in the past where a company was unable to access its funds because the sole owner of the key was unable or unwilling to transact. For example, when QuadrigaCX CEO Jerry Cotten died in December 2018, over $137 million worth of cryptocurrency was lost. The use of a multisig process simplifies access to funds and allows different employees to conduct transactions as needed.

While multisig wallets provide additional security and reliability, they do add some complexity to the process. Single key users have more control over their funds. They do not need to obtain permission from other people to conduct transactions or perform additional actions related to the use of their wallets.

Multisig wallet: advantages

Multisig wallets are popular because they provide several unique benefits for crypto traders.

Enhanced 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 does not require all signatures to access funds, you can avoid being blocked.

For example, you can create a "two out of three" wallet and store one private key on your phone, one on your laptop, and one on a piece of paper. If one of your signatures is stolen or lost, you will still be able to access your funds. Therefore, multisig wallets can be a great way to solve security problems.

Two-factor authentication

The requirement for multiple signatures also enables two-factor authentication (2FA). If someone can steal one of your keys, you can still prevent them from withdrawing funds from your account. You can store all private keys yourself or share them with others. In any case, this ensures that each transaction is fully verified before it is completed.

Making decisions

When the keys to a wallet are shared among multiple people, this allows the group to jointly control the funds. Everyone can see the funds and propose changes, but no one can transfer the funds themselves. This is very useful when making business decisions. Essentially, the wallet acts as a form of voting, whereby transactions only go through with the consent of a certain majority of users.

Escrowed transactions

When you are transacting with another party, it can be useful to hold funds in an escrow. Escrow transactions essentially ensure that neither party can receive funds, services, or products if the other party fails to honor their end of the transaction. Two of the three wallets allow you to enter into contracts with cryptocurrencies on an escrow basis. These transactions begin with the payer depositing their funds into the wallet. Once the other party provides the agreed goods or services, both parties can sign a wallet to transfer funds to the merchant. In the event of disputes, there is an impartial third party with a key that can award funds to the seller or buyer, as appropriate.

Multisig wallet: risks and disadvantages

Although multisig wallets are very useful, they do not work in all situations. There are some potential disadvantages.

Transaction speed

Adding additional signature requirements tends to slightly increase the duration of the transaction. If you can contact other key holders and coordinate the transaction, it won't take long. However, when you can't contact the other member, things get more complicated. Transactions that would otherwise be completed in seconds can take days to complete.

Technical Knowledge

Setting up a multisig wallet will require a few extra steps. Often you have to work through a third-party wallet provider, which can make the process a little more complicated. Since multisig wallets are only a few years old, it can be difficult to explain to others how they work, and regulations have not yet caught up with the new technology. Especially when creating a multisig wallet for your business, it is important to carefully study how wallets work and make sure you are doing everything right.

Fraud

Giving others access to your funds can be risky. Although rare, there have been cases where people have created a multisig wallet and then their friends, relatives or business associates have taken the money.

Multisig wallets are also involved in some common online scams. A typical multisig scam starts with the seller offering a cheap cryptocurrency and then saying they will send the buyer a wallet key. The buyer is unaware that the wallet is actually one of two multisig wallets, and the scammer removes the money from the wallet as soon as the victim pays.

Best multisig wallets to use

Keep in mind that not all multisig wallets are the same. Different crypto wallets have different levels of functionality. Here are some of the most popular options among crypto investors.

Armory

Armory is the most commonly used multisig wallet for BTC. It is useful in that it provides many different styles of wallets and has built-in protection against some hacks. Another big plus of Armory is that it offers an offline mode where you store your private keys on USB sticks. Just keep in mind that you may have to pay transaction fees if you want to access certain features.

Electrum

Electrum — one of the oldest multi-sig wallets for BTC. The interface of this wallet is very convenient and safe. You install it on your device without having to download the entire blockchain, and it integrates with other wallets like Ledger and Trezor. Electrum is also very easy to use as it works with simple payment verification. The only downside to this wallet is that it doesn't support other currencies than bitcoin.

Carbon

The biggest advantage Carbon Wallet is that it is a multi-currency wallet. Unlike many other wallets, it allows you to add many of the best cryptocurrencies to your wallet, including ERC-20 standard tokens. This makes Carbon Wallet ideal for businesses that work with a large number of smart contracts. However, please note that Carbon Wallet is a hot wallet that is always connected to the internet. This makes it a little more vulnerable to online attacks.

BitGo

BitGo is a bitcoin wallet that allows for many useful multi-sig integrations. Unlike many other cryptocurrency wallets, BitGo allows you to integrate your wallet with third-party cryptocurrency exchanges. Whichever integration you use, Bitgo's interactive design is intuitive and easy to use. Its open source wallet has many useful options such as free hack insurance and a desktop or web version. Just keep in mind that you will have to pay a little more for these advanced features.

Is it worth using a multisig wallet?

Whether or not to use a multisig wallet depends on your situation. It is often recommended for groups of people or for individuals who prefer increased privacy. However, if you are easily confused by technology or need fast transactions, a multisig wallet might not be for you. To decide if these wallets are right for you, take a close look at your needs and preferences.

If you care about protecting your money, using a multi-sig wallet is a good idea. Additional protection will help prevent the theft of your money, as well as ensure that other people can access your funds if you cannot find them. This will prevent a single mistake or hack from completely blocking access to your cryptocurrency. A multi-signature wallet is also useful if your funds are controlled by multiple users. If you are part of a cryptocurrency group or business, multi-sign wallets will ensure that all transactions are conducted fairly and properly.

However, when you are doing a lot of fast transactions in your wallet, the multi-sig protocol can get in the way. You might want to avoid using it if you don't think you will have time to wait for other signers to enter their private keys. Also, think twice about using a multisig wallet if you find it difficult to work with new technologies. This doesn't necessarily prevent you from using multisig wallets, but they do require some learning. You should be prepared to spend a little time getting to know your multisig wallet before you start using it for all your cryptocurrencies.

Final thoughts

A multisig wallet requires multiple private keys to be entered before making any cryptocurrency transactions. This process can help address security concerns and make it easier for groups of people to have fair control over funds. 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 assets.

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