Multi Signature (Multisig) Wallets – What You Need to Know

Beginner’s Guide / 30.10.2019

What are Multi-signatures?

A Multisignature wallet (or Multisig wallet) is one where you need control over multiple private keys to spend from that wallet. That is each address in the wallet has multiple private keys behind it. The idea with multi-sig wallets is that multiple people can cooperatively control the funds in the wallet. Alternatively, the wallet can require approval from multiple devices owned by the same person i.e. a form of second-factor authentication.

According to bitcoin.com“Multi-signatures can also be used for redundancy to protect against loss – with a 2-of-3 address, not only does theft require obtaining 2 different keys, but you can still use the coins if you forget any single key. This allows for more flexible options than just backups.”

With the primary principle of n-of-m signatures i.e., where n<m, a new layer of security and accountability can be added to an already pre-existing form of digital and physical exchanges and processes. With multi-signature technology, a group can increase the dependence of spending or using funds and ultimately increase accountability among the participants.

Firstly, multi-sigs greatly increase the difficulty of stealing or manipulating linked assets, as the greater the number of n, the higher it is to manipulate the m number of people. For instance, with a 2-of-2 address linked into a multi-sig transaction, a person has to keep the two keys on separate machines or used by separate entities and ensure both of them are used for all transaction linked to the asset. This makes theft and manipulation difficult as it will require compromising both the signatures. In theory, multi-signature technology is no different from paper-based financial agreements that may require more than one signature.

A single-key address is not usually the best option for entities with multiple stakeholders involved with cryptocurrencies. Imagine the funds of a big company being stored on a standard address, which has a single corresponding private key. This would imply that the private key would be either entrusted to a single person or multiple individuals at the same time – and that is not the safest way to go.

Multisig wallets offer a potential solution to both of these problems. Unlike single-key, the funds stored on a multi-sig address can only be moved if multiple signatures are provided (which are generated through the use of different private keys).

Some examples of Multi Signatures in real life

  • Say a company desires to set up a Bitcoin wallet accessible by 3 of its employees, but requires 2 of them to be involved in any transaction exceeding $5,000. To do so, it creates a 2-of-3 multi-sig address where it holds one key and an outside policy-enforcer holds another. This process increases accountability and transparency among the employees responsible for maintaining the transactions and balance of the company
  • In the traditional world of finance, a custodian is a trusted third party who holds assets on behalf of another. It’s important to note that with Bitcoin, there is no longer always a clear custodian of funds. In a 3-­of-­3 multi-­sig wallet where Bank of America, JP Morgan and State Street each hold 1 key, final custody lies only with the blockchain, which is, of course, decentralized itself. As a consequence, lawmakers and regulators will need to understand this new paradigm as they best determine how to adapt existing regulations and create new ones.
  • A board of directors might use a multi-sig wallet to control access to a company’s funds. For example, by setting up a 4-of-6 wallet where each board member holds one key, no individual board member can misuse the funds. Therefore, only decisions that are agreed upon by the majority can be executed.

To help our readers in choosing the best applications that help construction a Multisig wallet, we have outlined them in a small list below.

Best Multi-Sig Wallets in the Business

CoPay

Copay is a wallet released by BitPay, an industry leader in wallet technology. CoPay is the original secured and trusted wallet for Bitcoins and Bitcoin Cash, which recently also included functionality for Ethereum. It uses the lightning network on the backend and is traditionally known to negligible fees, protecting from the fee fluctuation known to the Bitcoin community.

CoPay also allows its users to have Multisig wallets with different private keys for no additional resource. It is an open-source feature that can be audited by anyone and everyone for any flaws. Constructing a Multisig wallet is relatively very simple when compared to other wallet providers, but that should not say that the users should not have at least a little technical knowledge.

BitGo

BitGo is the first wallet provider in the industry to claim Multisig functionality across 200 cryptocurrencies and blockchain. BitGo is the market leader in institutional cryptocurrency financial services, providing clients with security, compliance, and custodial solutions.​ BitGo is the world’s largest processor of on-chain bitcoin transactions, processing 15% of all global Bitcoin transactions in late 2018.

“When you sign up and create a wallet, it deploys a multi-sig contract onto the Ethereum blockchain,” said, Ben Chan, the CTO of BitGo.

This means that anytime a Multisig wallet is created, it forms an irrefutable contract on the Ethereum Blockchain, cementing the record.

BitGo also went on to innovate in the Multisig sphere by releasing Multiparty Computation or MPC, that rehires not just the signature of various parties involved in a Multisig transaction, but also requires them to compute the transaction in order to be fully verified. This innovation was highly praised in the industry and is considered as the new standard in Multisig technology.

Electrum

One of the oldest players in the industry, Electrum was formed in 2011 as a Bitcoin wallet provider. It was released under the MIT patent license to show it backing. Electrum has since added functionality for desktop, mobile phones and hard wallets. For now, Electrum stresses upon the importance of Bitcoin and only provides services on the Bitcoin blockchain.

The Electrum Multisig feature has been used by individuals and entities since half a decade and has shown a deterring resilience towards threats from bad actors.

Electrum also allows cross-platform linking by allowing Multisig contracts from other platforms, such as Copay, to be integrated into their platform and vice versa.

Coinbase WebWallet

The multi-sig vault, issued by Coinbase, is created by intelligently distributing three keys, two of which are required to unlock your funds. Coinbase, acting as a mediator and third-party, securely stores one key, asks you to store a backup user key, and both Coinbase and you store an encrypted third key, which can only be unlocked with a password you know. Because Coinbase never learns your password and never learns your user key, Coinbase never gains access to your funds.

“The multi-sig vault is designed to give you 100% control of your funds, with a balance of security and ease-of-use. You control the private keys which allow you access to your funds, yet you can easily spend your funds simply by entering a password.” – says the official Coinbase Blog, on the capabilities of the Multisig wallet.

Even though the third-party reliance is often discouraged by the industry, several entities still rely on Coinbase as it acts as a safeguard to misplacement. Coinbase promises utmost secrecy when it comes to storage, and as their reputation is quite high, scores of individuals trust Coinbase to act diligently.

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Sudarshan M is a long time crypto-enthusiast. Pulled in by bitcoin early on, it did not take long for Sudarshan to divert all of his academic attention from business studies to blockchain by doing his Masters and eventually pursuing his PhD in the subject.