What is a multi-signature wallet (Multisig Wallet)?
Multisig stands for multi-signature, and multi-signature is a specific type of digital signature that allows more than two users to sign a document as a group. Therefore, multi-signatures are generated by combining multiple single signatures. Multi-signature technology has now been applied to the cryptocurrency world, but in fact this principle actually existed before the birth of Bitcoin.
Multi-signature technology in the context of cryptocurrency was first used in Bitcoin addresses in 2012, and a year later this application gave birth to multi-signature wallets. Multi-signature addresses can be used in different environments, but most of them are used in areas related to security issues. And in this article we will discuss the use of this technology in cryptocurrency wallets.
How does it work?
As a simple analogy, imagine a safe with two locks and two keys. One key is held by Alice and the other by Bob. The only way to open the safe is for both people to provide keys at the same time, and when there is only one key, the safe cannot be opened.
This means that the multi-signature address where the funds are stored can only be accessed by using 2 or more multi-signatures. Therefore, the use of multi-signature wallets creates an additional layer of security for user funds. But before going any further, let’s first understand the standard Bitcoin address, since it relies on a single key rather than multiple signatures.
Single key vs multi-signature
Typically, Bitcoins are stored in standard single-key addresses, which means that anyone with the corresponding private key can access the funds. This also means that only one key is needed to sign a transaction, and anyone with the private key can transfer tokens in the address without any authorization.
It is true that single-key addresses are easier to manage than multi-signature addresses, but they also present a series of problems, especially in terms of security. Since there is only a single key, funds are protected by a single point of failure, which has led to cybercriminals constantly developing new phishing techniques to steal cryptocurrency users' funds.
Additionally, single-key addresses are not the best option for businesses involved in cryptocurrency. Imagine that a large company stores funds in a standard address with a unique private key. This means that the private key is either delivered to only one person, or entrusted to multiple people at the same time, but neither of these two methods is obviously the most secure and best way.
At this time, the multi-signature wallet provides a solution to the above problems. Multi-signature is completely different from single-key, that is, when funds are stored in a multi-signature address, the funds are only allowed to be transferred if multiple signatures (generated by different private keys) are provided.
Multi-signature addresses can set the key combination they require: the most common is two-thirds (2/3). This type of address means that you only need to provide 2 minimum signatures to access the funds in the 3-signature address. In fact, there are many other types, such as 2/2 (two-half), 3/3 (three-thirds), 3/4 (three-quarters), etc.
This technology has many potential applications. Below are some common use cases for multi-signature crypto wallets.
Increase security
By using a multi-signature wallet, users can avoid security issues caused by private keys being lost or stolen. Therefore, even if one of the keys is stolen, the funds will be safe.
Suppose Alice creates a 2/3 multi-signature wallet and then stores each private key in a different place or device (such as a mobile phone, laptop or tablet). The result is that even if her mobile device is stolen, the thief cannot use only 1 key to steal Alice's funds. Likewise, phishing attacks and malware infections are unlikely to be successful because hackers are only likely to hack a single device or steal a single key.
Malicious attacks aside, if Alice loses one private key, she can still use the other two keys to access her funds.
Two-factor authentication
By creating a two-key, multi-signature wallet, Alice can establish a two-factor authentication mechanism for her funds. For example, Alice could store one of her private keys on her laptop and the other on her mobile device (or even a piece of paper). This ensures that funds can only be traded if someone has access to both keys.
However, please keep in mind that there may be risks when using multi-signature technology for two-factor authentication (especially 2/2 multi-signature addresses). Because, if and when one of the keys is lost, you will lose access to your funds. Therefore, it would be safer to use a 2/3 setup, or use a third-party 2FA (two-factor authentication) service with a backup code. For exchange trading accounts, Google Authenticator is highly recommended.
Escrow transaction
Creating a 2/3 multi-signature wallet allows third-party escrow transactions between the two parties (Alice and Bob). There is also a third party (Charlie) between the two parties as the arbiter of mutual trust to prevent a trust crisis. .
In this case, Alice first needs to deposit funds in the wallet, after which the funds will be locked and no user can access the funds alone. Later, if Bob provides the corresponding product or service as agreed, the two of them can use their keys to sign and complete the transaction.
Only when disagreements arise does Charlie, as the arbiter, need to step in. At that point, Charlie will use his key to create a signature and, at his discretion, provide this signature to the correct party (Alice or Bob).
decision making
Corporate boards can use multi-signature wallets to control company funds. For example, if the board sets up a 4/6 multi-signature wallet, then each board member will have one key to hold. Finally, no individual board member can misuse the funds because access to the funds can only be performed with the consent of a majority of board members.
Disadvantages
Although multi-signature wallets can provide solutions to a number of problems, there are some risks and limitations involved. Because you need to have the necessary technical foundation when creating a multi-signature wallet, especially if you don’t want to rely on a third-party provider.
Additionally, since both blockchain and multi-signature addresses are relatively new technologies, it may be difficult to find applicable laws to resolve issues if they arise. Funds deposited in shared wallets (held with multiple keys) have difficulty finding legitimate custodians.
Summarize
Although multisig has some drawbacks, it has numerous desirable practical applications that make Bitcoin and other cryptocurrencies more useful in business. Since it requires multiple signatures to complete fund transfers, multi-signature wallets provide higher security and allow third-party escrow transactions between mutually untrusted parties. Advantages such as these may make this technology more widely used in the future. application.
