Multisig stands for multi-signature, which is a special type of digital signature that enables two or more users to sign documents as a group. So a multisignature is created by the combination of more than one unique signature. Multisig technology is used within the cryptocurrency world, but the underlying idea predates the creation of Bitcoin.
In the context of cryptocurrencies, the technology was first applied to Bitcoin addresses in 2012 and ultimately led to the creation of multisig wallets a year later. Multisig addresses can be used in different contexts, but most uses are related to security concerns. This article will focus on their use in cryptocurrency wallets.
How does it work?
As a simple analogy, we can think of a safe with two locks and two keys. Alice has one key and Bob has one key. The only way they can open the safe is if both keys are present at the same time, meaning neither can open the safe on their own without the permission of the other.
Simply put, funds stored in multi-signature addresses can only be accessed by 2 or more signatures. So the use of mutisig wallets allows users to create an additional layer of security around their funds. But before we go any further, it's important to understand the basics of standard Bitcoin addresses, which use single keys instead of multiple.
Single and multiple key comparison
Generally, Bitcoins are stored in standard single-key addresses, meaning whoever has the key corresponding to the address also has the right to access the money. This means that a single key is needed to sign trades, and anyone with the private key can transfer coins without anyone else's permission.
Although it is faster and easier to manage a single-key address than multi-keys, this type of addresses creates various problems, especially security. With a single key, funds are protected with a single point of failure, which is why cybercriminals are constantly developing new phishing techniques and trying to steal cryptocurrency users' accounts.
Moreover, single-key addresses are not the best option for businesses using cryptocurrency. Consider the capital of a large company being held in a standard address with a single matching private key. This means that the private key will be entrusted to one person or given to more than one person at the same time, which is not very secure.
Using multisig wallets provides a potential solution to both of these problems. Unlike single keys, funds held in multisig addresses can only be moved if multiple signatures are provided (thanks to the use of different private keys).
Depending on how the multisig address is configured, it may require the combination of a different number of keys: 2 of 3 is the most commonly used, where only 2 signatures are required to access the account of the 3-signature address. But there are many other variations, such as 2 of 2, 3 of 3 or 3 of 4.
This technology has a variety of possible uses. Some of the most common uses of multi-signature cryptocurrency wallets include:
Increasing security
By using a multisig wallet, users can avoid problems caused by loss or theft of the private key. Even if a key is lost, the account remains secure.
Imagine Alice creates a 2 out of 3 multisig address and stores each private key in a different location or device (mobile phone, laptop, or tablet). Even if the cell phone is stolen, the thief cannot access Alice's accounts using 1 of the 3 keys. Similarly, phishing attacks and malware are less likely to succeed because the hacker can probably only access one device and therefore one key.
Malicious attacks aside, if Alice loses one of her private keys, she can still access her account using the other two.
Two-step verification
By creating a multisig wallet that requires two keys, Alice can create a two-factor authentication mechanism for accessing her account. For example, he might keep one of his private keys on his laptop and the other on his mobile phone (or even on a piece of paper). In this case, it is guaranteed that only someone who has both keys can make a transaction.
However, using multisig technology as two-step verification can also be dangerous, especially in the case of a 2-of-2 multisig address. If one of the keys is lost, you cannot access your account. Therefore, it may be safer to use the 2-of-3 scheme or use a third-party 2FA service that works with backup codes. It is highly recommended to use Google Authenticator for stock exchange accounts.
Escrow transactions
2 of 3 Creating a multisig wallet allows for an escrow transaction between two parties (Alice and Bob) that includes a third party (Charlie) as a mutually trusted arbiter in case something goes wrong.
In such a scenario, Alice deposits the money first and it is locked (neither user can access it on their own). Then, when Bob provides the agreed upon product or service, they both sign and complete the money transfer using their own keys.
Charlie only becomes involved as an arbiter if there is a dispute, and as a result of his evaluation, he uses his own key to create a signature that Alice or Bob can use.
To decide
The board of directors can also use multisig wallets to control access to the company's accounts. For example, by setting up a 4 out of 6 wallet, each board member has a single key and no one can use the account for their own benefit. Therefore, only decisions agreed upon by the majority can be implemented.
Disadvantages
Although using multisig wallets can provide successful solutions to various problems, it should not be forgotten that there are some risks and limitations. Setting up a multisig address requires some technical knowledge, especially if third-party providers will not be used.
Additionally, because blockchain and multisig addresses are relatively new, it can be difficult to get legal help if something goes wrong. There is no legal liability for accounts stored in shared wallets with multiple key holders.
Conclusion
Despite a few drawbacks, multisig wallets have many interesting applications and make Bitcoin and other cryptocurrencies much more useful and interesting, especially for businesses. By requiring multiple signatures to transfer money in the account, multisig wallets provide a higher level of security and enable trustless escrow transactions. It is very likely that the use of this technology will increase in the future.