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What is a Multisig Wallet?
General Wallet Use
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15 min
Since the launch of Bitcoin, wallets have remained hugely important for navigating and interacting with the crypto world. They provide crucial functions such as allowing users to store tokens, enabling transactions between different parties, and ensuring through a verification process that a user owns the crypto assets they possess.
Considering how valuable crypto wallets are, more and more innovations in the wallet space have focused on improving the wallet experience for users. This eventually led to the development of the multi-signature (multisig) wallet. These types of wallets were designed to improve both user experience and wallet security.
This Learn Center piece will dive into what multisig wallets are, how they work, and their primary use cases.
Defining a Multisig Wallet
A multisig wallet requires more than one signature for a transaction. Unlike a regular crypto wallet, which typically only needs a single signature belonging to one Bitcoin user, a multisig wallet needs at least two signatures held by multiple parties.
A regular crypto wallet only requires one key to approve a transaction, and if that key were to be compromised, the wallet would become susceptible to hacking and theft. Multisig wallets, on the other hand, have multiple private keys. This mitigates the risk of theft because even if one user’s key is compromised, the hacker would still be unable to access the wallet.
Signers can also use smart contracts to establish rules when accessing their multisig wallet. With each party given some level of control, users can customize their multisig wallet based on their preferences and specific security requirements.
How Does a Multisig Wallet Work?
As previously mentioned, a certain number of signers must approve a transaction before it is executed with a multisig wallet. While any party can initiate a transaction, the transaction will remain “pending” until a certain amount of signatures is reached. A multisig wallet will implement one of two settings to carry out this procedure: N-of-M and N-of-N.
N-of-M
Under this type of multisig wallet, only a certain subset of signers (N) out of the total number of signers (M) are needed to approve a transaction. While the configurations may vary depending on the multisig wallet’s needs and how many parties there are, some examples include:
1-of-2: One user can approve transactions without the authorization of the other signer.
2-of-3: Two of the three signers must approve a transaction before it is executed.
3-of-5: Three out of five parties must sign off on a transaction before it can be carried out.
N-of-N
With this type of multisig wallet, all N-designated signers must unanimously agree on whether a transaction takes place. Like N-of-M, the configurations for this type of multisig wallet depend on how many users are involved and what the transaction entails. One common example of this includes:
2-of-2: Also known as the “duo signature” wallet, both designated signers have to agree on a transaction before it can be validated. While either party can initiate a transaction, the funds remain in the wallet until both users approve the transaction.
Common Use Cases for Multisig Wallets
Multisig wallets are typically used when a group of Bitcoin users wants to own and manage a single crypto account. Some common use cases for multisig wallets include:
Shared Business Accounts: Some businesses use multisig wallets to manage transactions and funds such as requiring multiple executives to authorize a transaction. By mandating a certain number of signatures, these businesses control what transactions are made and mitigate the risk of fraud and theft.
Escrow Payments and Services: Escrow transactions and services typically utilize 2-of-3 multisig wallets in which a third party holds a key and serves as an arbitrator. Whenever a dispute breaks out between two signers, the third party holds all the funds and blocks the signers from accessing them until an agreement is reached.
Joint Accounts/Ownership: Multisig wallets are useful for friends or family members who wish to manage shared expenses and finances by giving each signer a certain amount of control over funds.
Multisig wallets are also helpful for platforms and protocols that prioritize security, transparency, and decentralized control. Examples of these platforms/protocols include:
Decentralized Finance (DeFi): DeFi applications like decentralized exchanges (DEXs) and asset management platforms use multisig wallets to manage funds and protocol governance.
Smart Contract Platforms: Platforms like Ethereum that support smart contracts take advantage of multisig wallets as they can be integrated into smart contracts and ensure secure and transparent interactions.
Decentralized Autonomous Organizations (DAOs): DAOs and other decentralized blockchain governance benefit from multisig wallets because they allow multiple parties to collectively make decisions and control funds.
Multisig Wallet Security
Multisig wallets provide an extra layer of security and play a major role in ensuring that users’ assets are secure.
Even if one key were to be compromised, a hacker wouldn’t be enough to access a wallet’s assets as they would need to compromise multiple keys at once. A multisig wallet’s enhanced security features dramatically reduce the likelihood of fraud, theft, unauthorized access from hackers, and other actions that could negatively impact users’ assets.
One of these features is a system called two-factor authentication (2FA). Under 2FA, all pending transactions must be validated by a certain number of users before they can be approved. This system gives signers the ability to keep each other in check as it stops malicious actors from accessing assets without authorization and revoking their access once caught.
Additionally, 2FA is strengthened by the fact that the keys needed to access a wallet are kept at different locations or with different people. This reduces the chances of a bad actor getting their hands on all the keys. At the end of the day, the users of a multisig wallet are the keepers of their own keys.
Conclusion
A multisig wallet is a type of crypto wallet that requires multiple approvals before a transaction can be made. There are two forms of multisg wallets: N-of-M, where only a certain number of signers are required to approve a transaction; and N-of-N, where all signers must unanimously agree on approving a transaction.
Some common use cases for multisig wallets are shared business accounts, joint accounts/ownerships, and escrow transactions. Ultimately, multi signature wallets provide their own security measures to protect users' assets.
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