Multi Signature Wallet: Top Attributes You Need to Know | Beginner's Guide

Anisa Batabyal
| 07 February, 2020 | 2 min

What is a Multi-Signature Wallet?

Multi-Signature, also known as Multi-Sig, is a digital signature that enables two or more users to sign a document as a group contract. A multi-signature is produced through a combination of multiple unique signatures. The technology of Multi-Signature has been prominent in the crypto space, but the principle was even there long before crypto came into existence. Multisig technology was first applied to a Bitcoin address in 2012, after which the Multi-sig wallets were created in a year.

Multisignature wallets are mostly used to divide the possession of the crypto assets. So in order to withdraw anything from a multi-sig wallet, more than one signature is required, whoever is owning the assets. As Bitcoin transactions seem complicated, it requires multiple signatures before funds are transferred.

How Does it Work?

Let us show how it works with a simple example. Let’s imagine a deposit box having two locks and two keys. One of the keys is owned by say “A”, and the other one by “B”. The only way both of them can open the deposit box is by using both their keys. 

Similarly, in a multi-signature wallet, you can access or control the funds by providing multiple signatures. So, this enables an additional layer of security to the funds. If one person makes any mistake with the private key pr public address, then there are other chances of re-validation. Let us understand the difference between Single Key and Multi-Sig first.

Single Key vs Multi-Sig

Bitcoins are stored in a single-key address, which is standardized, which means that whosoever holds the corresponding private key will be able to access funds. This means that only one key is needed to access the assets and they can send the funds at their own will, without having to take authorization from any other person. When there’s no other person involved, it leads to faster processing of funds as there is no dependency.

But the Single key has a lot of issues, especially when it comes to security. By having a single key, the funds are protected by one layer of security. Hence crypto assets and exchanges are always trying to figure out the contingency plan for phishing and scams. Single Key addresses are not secure when its a lot of funds to be monitored. It's just like a big safe deposit box under a single person’s authority. That involves a lot of risks and clearly not that safe.

Here’s where Multisig wallets come into the rescue as for any kind of activity in such wallets, multiple signatures or authorization is required to move the funds, which are generated through the use of different private keys. In order to configure a multi-sig address, it requires a different combination of keys- of a 3-signature address, 2 of 3 is the most common one, i.e., two signatures are sufficient to access the funds of a 3-signature address. There are other variations as well.

Now, let us understand the specific uses of Multi-sig wallets:

#1 Increasing Security

When the users are using a multi-signature wallet, they are able to secure their funds to the optimum level. So if one of the keys is compromised. Imagine “A” creates 2 of 3 Multi-Sig addresses and stores each private keys into a different device for an extra layer of security. So even if any of the devices get stolen, the thief won’t be able to access the funds using one private key from that stolen device. The same goes for malicious phishing attacks.

#2 2 Factor Authentication (2 FA)

Multi-Sig Wallets require two keys to access the assets stored in the wallet. So for instance, if “A” creates a two-factor authentication, where one private key is stored in her laptop and one in her mobile phone, then in order to access the funds or make a transaction, one needs to know both the private keys.

It’s always advised to use a 2-of-3 setup instead of 2-of-2, as in case of the latter if one of the keys is lost, you won’t be able to access the funds. On the other hand, if its the former with backup codes, its safer. Whenever one needs to trade accounts, Google Authenticator is highly recommended.

#3 Escrow Transactions

In case you create a 2-of-3 multi-sig wallet, you can enable an escrow transaction between two parties (say “A” and “B”, as stated earlier, including another individual named “C”- who will be a mutual arbiter in case anything goes wrong). In such scenarios, “A” would first deposit the funds, and then it's locked up (which none of the users (“A” or “B”) would be able to access. At this juncture, if “B” provides the items as agreed, then they can both use their keys to complete the transaction. “C” would only step in when there is a dispute between “A” and “B”.

#4 Decision Making

A board of directors might use this Multisig wallet for accessing the company funds. So it's a mutual decision making, wherein none of the members are able to misuse the funds. Decisions can be executed only after the majority agrees.

Limitations

Setting up a multi-sig address requires some technical knowledge as there are a lot of risks involved. In case you decide on depending on the third-party providers, you need to know some of the technicalities. If something goes wrong, then it is a bit difficult to seek legal recourse.

Despite these limitations, Multi-sig wallets have numerous interesting applications, making cryptocurrencies more appealing and trustworthy.

Let us check the top Multi-Sig wallets:

#1 Electrum

Electrum is a light-weight multi-sig wallet for Bitcoin that supports cold storage, which is one of the most trusted Bitcoin wallets available. It is an open-source project released under an MIT license. It even supports integration with third-party hardware wallets like Ledger, KeepKey, Trezor, etc. Electrum is available for Windows, Linux, Mac, and Android devices.

Click here to access Electrum

#2 Armory

Armory is an HD-Bitcoin wallet which is non-custodial,i.e, the users have total control over their private keys, without relying on any third-party servers. It is also a multi-sig wallet with cold storage support, with a lockbox feature. It provides up to 7-of-7 multi-sig authorization. Armory is available for Mac OS, Windows, and Linux, as of now. It is one of the best multi-sig wallets.

Click here to access Armory

#3 Copay

Copay is an open-source HD, a multi-sig wallet that secures your funds effectively. This is also a non-custodial wallet, where you have total control over your keys. The best part about Copay is that you can test it out before using, on your Android or iOS devices. It provides up to 2-of-3 authorizers for accessing the funds. It is available for Linux, Windows, Mac, iOS, and Android devices.

Click here to access Copay

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Reference: Binance Academy