What is a MultiSig Wallet and How to Use One?
Experienced crypto holders understand the difference between hot and cold wallets, software and hardware wallets, or custodial and non-custodial wallets. However, there’s a fourth category, single key vs. multisig wallets. I know what you think. Yet another crypto wallet. Do I really need to learn about multisig wallets?
Yes! A smart trader prioritizes security. A multisig wallet can level up your security to improve crypto funds protection. Today, we’re exploring the world of single key vs. multisig wallets and the different key combinations for multisig wallets, such as “M-of-N” or “N-of-N”.
What is a Single Key Wallet?
Usually, you store crypto funds in a standard, single-key address. To transfer funds on the blockchain, you’ve to sign the transaction with your private key. It’s the most common way of transferring funds. You can compare this to opening your car with your car key. A single key can unlock your funds.
Using a single key to manage your funds is easy. However, it doesn’t cover all possible use cases for crypto wallets. A single key acts as a single point of failure. If you forget your private key or a hacker manages to get access to it, you lose all your funds. Phishing techniques have become more sophisticated, aimed at stealing your private key.
A multisig wallet offers a solution to these evolved security threats. With a single-key wallet, we can move funds with a single unique signature. A multisig wallet requires multiple unique signatures to transfer crypto funds. Let’s learn more about them.
What is a Multisig wallet?
Multisig technology was created in 2012 as people saw a need to share an account with one or multiple persons securely. The Bitcoin blockchain was the first chain to implement multisig addresses, and so, multisig wallets were born the year after.
A multisig wallet allows you to sign a transaction as a group. Consequently, we need to provide multiple unique signatures to transfer funds.
Let’s compare a multisig wallet with a vault that requires two keys to unlock it. Therefore, you need both keys at once to open the vault. If you brought one key, you can’t access your funds.
Another example would be a bank account shared between you and a close friend. To transfer money from this shared bank account, you both have to approve this transaction.
Many different types of multisig wallets exist. The above examples introduce multisig wallets that require every involved person to sign. What if you want to share a bank account with three business stakeholders and only require two of them to sign to approve a transaction?
Here, you want to use an “M-of-N” multisig wallet. Let’s discuss the difference between “N-of-N” vs. “M-of-N” multisig wallets.
N-of-N or M-of-N Multisig Wallets - What’s the difference?
You might see the terms “N-of-N” multisig wallet or “M-of-N” multisig. These abbreviations refer to the possible key combinations for multisig wallets.
A “2-of-3” multisig is an example of an “M-of-N” multisig wallet. Imagine you create a multisig wallet with two other close family members you trust. To submit a transaction, we require only two out of three unique signatures to access your funds.
Whereas a “3-of-3” multisig is an example of an “N-of-N” multisig wallet. Here, every unique signature is required to access the funds. In other words, all three users have to sign the transaction. However, we can still lose access to your wallet when one of the private keys gets lost.
Moreover, you can create a multisig wallet for personal use to improve your wallet security. For example, you own a laptop, mobile phone, and desktop. On each device, you create a keypair, and you add those three public keys to your multisig wallet.
Now, when you want to move your funds, you’ll have to sign the transaction with each device’s private key. This strategy allows you to protect your funds from hackers gaining access to one of your devices. Hackers can’t move your crypto as they require a signature from the remaining two devices.
Notably, many other combinations are possible, such as 3-of-4, 4-of-5, or 3-of-5.
Examples of Multisig Wallets
Let’s take a look at different use cases for multisig wallets.
1. Escrow account
Escrow allows you to trustlessly move funds between parties. Let’s say you want to buy an expensive second-hand surround sound system from a person you have never met.
Both buyer and seller agree to use an escrow account. The buyer can deposit the funds into the newly created escrow account. At the same time, the seller wants to release the funds only when they receive the surround sound system by mail.
However, creating a 2-of-2 multisig wallet isn’t an ideal solution. What if both parties disagree about the sound system's arrival or the buyer believes the surround system doesn't work as described? In this case, the funds are stuck in the multisig account.
Therefore, an escrow account uses a third, independent mediator. Next, add the mediator’s public key to the escrow account to create a 2-of-3 multisig wallet. Now, this allows for two possible scenarios.
Scenario 1: Both buyer and seller agree on the arrival and quality of the surround sound system. Both persons sign the transaction to move the funds to the seller.
Scenario 2: When both parties disagree, the mediator needs to interfere to find a solution. Imagine that the seller can submit shipment proof for the surround sound system. Then the seller and mediator can sign the transaction to move the funds to the seller.
In other words, there’s no scenario where the funds get stuck in the escrow account unless the mediator is unresponsive or can’t resolve the situation.
2. Multisig wallet for business shareholders
Safeguard funds for your business by handing out a key to each one of the four shareholders. To make business decisions, you require three shareholders out of four to sign the business transaction. This method allows you to reach an agreement with the majority of the shareholders.
3. Extra security layer
Instead of using a single key to access your crypto wallet, you can create multiple keys for multiple devices you own. When you want to move funds, you need to sign your transaction with each of the listed devices. This adds an extra layer of security as hackers need to gain access to all of your devices to steal funds.
Bear in mind that losing one of your devices might cause you to lose access to your funds. Therefore, opt for an “M-of-N” multisig wallet over an “N-of-N” wallet.
Single-key vs. Multisig wallet - Which is best?
This article has introduced the difference between single-key vs. multisig wallets and what variations exist for multisig wallets.
If you prioritize security, you can create an “M-of-N” multisig wallet to distribute the keys across different devices you own. This way, hackers can’t move your funds unless they gain access to all of your devices.
However, it’s much more convenient to use a single-key wallet as you can quickly confirm a transaction. To conclude, the discussion of single-key vs. multisig wallets boils down to security over convenience.
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