Multisignature Wallets: Enhancing Security with Shared Control

What is a multi-signature wallet? 

A multisignature wallet or multisig wallet is a type of cryptocurrency wallet that requires multiple signatures (private keys) to authorize and execute a transaction.

Simple Analogy: Joint Bank Account

Imagine you and your partner opened a joint account. This means both of you need to authorize any withdrawal of funds from the account. A single person's approval is not enough to withdraw money, since it's a joint account. 

Similarly, in a multisig wallet, multiple private keys are required to approve a transaction before funds can be moved, just like how both account holders need to sign off on a withdrawal.

Single-Signature Wallets Vs. Multi-Signature Wallets

In a traditional single signature wallet, the wallet generates private keys which we control, therefore we don't need someone else's approval to sign a transaction. 

However, this is entirely different with multisig wallets. These wallets require the approval of a certain number of users (via their private keys) to sign a transaction before funds can be moved.

Therefore, it's worth exploring the unique features offered by both types of wallets to understand how they differ. This way, we can decide which one to use based on the specific circumstances and security needs.

💡Do not confuse single-signature and multi-signature wallets with software/hot and hardware/cold wallets. While most hot and cold wallets are single-signature by default - meaning they require only the owner's approval to sign transactions, these wallets can be configured to function as multi-signature wallets if multisig features are available in them.

Types of Multi-Signature Wallets

Multisignature crypto wallets are defined by the number of private keys they contain, and the number of signatures required to authorize a transaction.

These signatures, known as digital signatures, act like fingerprints for transactions-each is created using a private key and can be verified with a public key. This ensures authenticity and security without revealing the private key itself.

Most common types of multisig wallets include:

1. M-of-N multisig wallets (Threshold Multisig)🔒

In this type of wallets, “M” is the minimum number of signatures needed to approve a transaction, and "N" is the total number of private keys or participants involved.

For example, in a 2-of-3 multisig wallet:

• There are 3 keys (held by 3 different people or devices).
• At least 2 signatures are required to approve a transaction.

The setups can go for like 3-of-5, 4-of-7, and more. So, in a 3 of 5 multisig wallet, out of 5 designated key holders, at least 3 key holders must sign (authorize) the transaction for it to be executed.

2. N-of-N multisig wallets 🔒

In this type of multisig (shared) crypto wallet, all designated signers must approve a transaction before it can be processed.

For example:

• In a 2-of-2 setup, both parties must sign.
• In a 3-of-3 setup, all three must sign.

The above two types of multisig wallets (M-of-N and N-of-N) are the most common types. Depending on the requirements, there are few more advanced decentralized multisig wallet types:

🔒Sequential Multisig wallet - transactions must be signed in a specific order. If the setup requires signatures in the order B → A → C, then the transaction must follow this exact sequence; otherwise, it won’t be processed.

🔒Time - locked Multisig - Here, even if the transaction is authorized by multiple key holders, the transaction will only execute at the specified date and time. 

🔒Geo-Fenced Multisig - This requires keyholders to be present in specific geographical locations to authorize transactions.

How to Setup Multi-Signature Wallets 

Scenario: Imagine you, and your friends - Bob, and Charlie are starting a new business together, and you guys want all the business profits to be securely managed in a multisignature crypto wallet. To ensure that no single person has full control over the funds, you decided to create a Threshold Multisig Wallet (M-of-N).

Step 1: Install or buy a multisig compatible crypto wallet

First of all, each of you should buy or install a multisig compatible crypto wallet, many software wallets such as Electrum,Sparrow,Cobo support this feature. Hardware wallets such as ledger and Trezor also support multisig configuration.

💡Quick Tip - It's better if each one of you download or buy the same wallet that supports multisig configuration because not all wallets support the same multisig standards.

Step 2: Generate Public Keys

Each of you - you, Bob, and Charlie should generate their own public key. If you guys decide that your crypto should be in Bitcoin, then each one should use the multisig setup feature to generate their own public key associated with Bitcoin.

Step 3: Choose the multisig wallet and Share Public Keys

You now have to decide which multisig compatible wallet you guys would want to create the multisig bitcoin address. The wallet does not have to be the same wallet that each of you used. 

For example, if each of you used the sparrow software wallet to get the public keys, you can decide to use Electrum or hardware wallet like Trezor to create the multisig wallet address.

After deciding, everyone should share your individual wallet created public keys with the multisignature wallet. The specific steps can vary depending on which type of wallet you use. 

This step is the most important step because the wallet needs to recognize all the 3 public keys of the respective participants.

In summary, to generate the public address of a multisignature wallet, you need to provide your respective public key securely into that wallet that generates the multisig public address.

Step 4: Create the multisignature wallet

➡️Open your decided wallet (e.g., Electrum, Trezor) and select Create New Wallet.

➡️Select the Multi-signature Wallet option.

➡️Specify the total number of participants (N) and the required signatures (M). In your case, 2-of-3 is the setup, where 3 participants are involved, and 2 signatures are needed to authorize transactions.

➡️Import the public keys from each participant of the wallet.

➡️The wallet software will generate the multisig address that can be used for receiving funds. Transactions will require the specified number of signatures to be approved.

💡The above process is a standard approach used in most wallets that support multisig functionality.

Step 5: Fund the Wallet

You start receiving business profits into this new multisig wallet address. This address will be used for all business-related transactions.

Step 6: Transaction Approval

Whenever you need to send funds from a 2-of-3 setup, two out of the three participants - either you and Bob, Bob and Charlie, or you and Charlie must sign the transaction. Since this is a 2-of-3 configuration, any transaction can only proceed once two of you approve and authorize it.

Best situations where Multisig Wallets can be used

Business and Organizational Funds

Example: A business startup where three co-founders set up a threshold multisig  wallet of 2-of-3 to manage funds collectively, where at least two co-founders must approve any transaction to prevent the misuse of funds.

Family Inheritance

Example: A person sets up a 2-of-3 multisig wallet with keys held by themselves, their lawyer, and a trusted family member. After their passing, the heirs can access the funds with the approval of the lawyer and family member.

High value personal savings

Example: if you have millions or billions of dollars of crypto, you can set up a 2-of-3 multisig wallet with keys stored in different locations (home safe, bank deposit box, etc). In this way even if one key is stolen, the funds remain secure.

Fundraising and Crowdfunding

Example: A project team raises funds for a new product and stores them in a 3-of-5 multisig wallet. Five keyholders (e.g., team leads and advisors) must approve any spending.

Non-Profit Organizations

Example: A charity sets up a 2-of-3 multisig wallet to manage donations. Three keyholders (e.g., the CEO, treasurer, and a board member) must approve any transactions. 

Decentralized Autonomous Organizations (DAOs)

Example: A DAO uses a 3-of-5 multisig wallet to manage its treasury. Five keyholders (e.g., core team members) must approve transactions, with at least three signatures required.
DAOs often manage large amounts of funds and require collective decision-making for transactions making multisig wallets a perfect solution.

Final Thoughts

Multisignature wallets provide an extra layer of security by requiring multiple private keys to approve transactions, reducing the risk of a single point of failure. Even if one key is compromised, an attacker would still need access to additional keys to move funds. 

Despite these advantages, multisig wallets are not widely adopted or well-known among everyday users. However, they offer valuable security, especially for businesses, organizations, and high-value asset holders. 

Ultimately, choosing between a multisig and a single-signature wallet depends on personal needs, neither is better than the other, as both serve different purposes in securing cryptocurrency.

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.