What Is a Multisig Wallet?

It is a fact that all crypto investors, organizations and users should keep their cryptocurrency safe. One way to increase the security of cryptocurrencies and other digital assets, like non-fungible tokens, is to use multisignature wallets. This is a departure from the current rampant practice where wallet holders have single private keys. A contributing factor to the poor adoption of multisig wallets is the difficulties associated with their configurations and use. This article covers the importance of using multisig wallets and their use cases.

What Is a Multisignature Wallet?

A multisig wallet is a digital wallet that requires at least two or more private keys to sign in and make a transaction. Transaction here means sending a digital asset such as cryptocurrency. We can compare a multisignature wallet, also called multisig, to a secret safe which requires two keys to unlock. In a home scenario, the wife would have one of the keys while the husband has the other. In this case, it is impossible for one of the spouses to unlock the safe by solely using their single key.

In order to increase the security of digital assets stored in a wallet, two or more people will keep the private keys separately.
If it is at a family level, the husband can keep one of the private keys while the wife has the other one. Or else, you can make such similar arrangements.

• At the corporate level, two or more directors or senior managers can separately keep the keys.
• As a fact, an organization or household can have two, three, four or more private keys. The number of keys depends on the configurations that you make.

Also, a multisig allows more flexible scenarios. An organization with five private keys, for example, could set a minimum of three private keys to sign in the wallet and make transactions, exempting the need to use all five private keys simultaneously to sign in the wallet.
A multisig wallet is different from the standard crypto wallet you can think of. A standard digital wallet requires a single private key to login and make transactions.

How Does a Multisig Wallet Work?

Now that you understand the basics of a multisig digital wallet, we need to look at how it works. The first thing to do is configure the wallet with the parameters you want, since it can be customized to suit your needs. For example, you can choose to use only two keys to sign in and make any transactions. Alternatively, you can select to use three private keys to sign in the wallet. However, note that the rules become very strict once you have configured the wallet the way you want.

If you choose to unlock the wallet using more than two keys, then there is a need for the majority to approve transactions. For instance, where there are three private keys, the norm is that two signatures are enough to authorize a transaction. In this situation, if one of the members is not around, two signatures are enough to make a transaction.

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However, it does not necessarily mean that there should be more than one person to manage a multisig wallet. For example, as an individual, you can use two private keys to make a transaction, one on a computer and another on a smartphone. The logic behind using more than one key is to enhance the wallet’s security.
Although it is possible to have the number of keys equal to the number of signatures to unlock the wallet, the danger is that if you lose one of them, you will not be able to use the wallet.

Use Cases of Multisig Wallets

Apart from increasing security, multisig wallets bring new ways of managing businesses or enhancing accountability.

Using a Multisig as 2 Factor Authentication

Having a multisig wallet enables a user to have a two-factor authentication mechanism. To make a transaction, a user logs in using one gadget and verifies another. For instance, he/she logs in using a laptop and verifies through a mobile phone. This way only a person with both private keys can make a transaction.

Escrow Transactions

A 2-of-3 multisig wallet enables an escrow service between two parties where there is a third party that acts as the arbiter if an agreement does not go as planned. For example, the paying party deposits the funds into the wallet. The cryptocurrency is locked up, waiting for the provision of a service or product. If the other party provides the service or product, they will use their private keys to login and make the transaction. The arbiter can only step in if there is a dispute and use their private key to help release the funds to the proper party.

Handling and Use of Organization Funds

Note that when we use the term funds here, we refer to cryptocurrencies or any other related digital currency. The directors of a company can use a multisig wallet to store their funds. As such, by creating a 4-to- 6 wallet, where each board member has a private key, they increase accountability in the use of funds. The funds are released only after an agreement by the entire board.

Joint Family Wallet

A husband, wife, and children can collectively have a multisig wallet. As a result, they can spend the funds after a collective decision to do so.

Source: Pixabay

Advantages

Some advantages of using a multisig wallet include:

• Enhanced security: As we have already hinted, multisig wallets increase the security of digital assets. Given that a transaction can only take place after using the required private keys.

• Better control over funds: A multisig wallet can be set up so that multiple parties are required to sign off on transactions, making it more difficult for a single person to make decisions about how the funds are spent.

• Improved accountability: For auditing and tracking purposes, a multisig wallet makes it evident who has approved each transaction.

Also, in a group environment, multisig wallets help members to reach consensus which is very suitable for organizations. For example, an organization can only purchase a certain asset after reaching an agreement to do so.

Disadvantages

Some disadvantages of using a multisig wallet include:

• Complexity: Setting up and using a multisig wallet can be more complex than using a traditional wallet, which may make it less appealing to some users.

• Reduced flexibility: Because multiple parties are required to authorize transactions, it can make it more difficult to make quick decisions about how to use the funds.

Multisig wallet is generally more secure and helpful for group administration, but it may also demand more technical expertise and have certain drawbacks like disputes.

Conclusion

People are increasingly adopting the use of multisig wallets for several purposes. However, the main reasons are to increase the security of the assets as well as enhancing accountability and transparency. Generally, these wallets are more suitable for organizations and group setups such as families as they enable shared responsibility in making transactions. However, the key downside is that if the parties lose one or more keys, they may not be able to recover and use the account. Although multisig wallets increase the safety of the digital assets, they do not eliminate all the risks.