What Is a Multisig Wallet?
A multisig wallet is a digital wallet that makes use of multiple private keys and signatures to authorize crypto transactions. It facilitates hassle-free decision-making and better security in crypto fund management.
Summary of Important Points
- A multisig wallet requires multiple private keys to unlock digital assets.
- You can configure a multisig wallet with different combinations of keys.
- It improves the security of crypto funds by putting up multiple barricades against hackers.
- You can use a multisig wallet to create two-factor authentication for withdrawals.
- A shared wallet allows fair decision-making and prevents the misuse of funds among partners.
- It is also a great tool for escrow transactions, with one key being held by the arbiter. If there is disagreement, the arbiter can analyze the situation and use his keys accordingly.
- Multisig wallets are technically and legally complex.
How Does a Multisig Wallet Work?
Anybody can send funds to your crypto wallet if they know its public address. However, you need a private key to withdraw funds. A private key is like a password that proves the ownership of a wallet. They are used to create digital signatures, which can be verified without disclosing the private key.
The problem is, you lose your funds if the private key is lost or compromised.
This is where a multisig wallet comes in. It can be best explained as a vault that has more than one lock. You need more than one key to unlock it as well. Let’s say your multisig vault has three private keys. According to the predefined conditions, you can only open it with a combination of these keys. It can be 3-of-3, 2-of-3, or even 1-of-3.
Multisig wallets offer a way to set up two-factor authentication for withdrawals. You can store the keys on multiple devices to add an extra layer of protection. If the wallet is shared by two or more users called copayers, you would need their consent before using the fund.
How Do You Create a Shared Wallet?
The process to create a multisig wallet varies according to the wallet provider and the type of wallet. Most wallets come with step-by-step guides to help users onboard.
Multisig wallets were introduced as a means to secure the Bitcoin blockchain. Over time, many Bitcoin multisig wallets entered the market. Currently, you can use a multisignature wallet for Ethereum and other popular cryptocurrencies too. Depending on where your interests lie, you can go for a multisig hardware wallet or an online wallet to store funds.
Advantages of a Multi-Signature Wallet
- Multisignature wallets mitigate the risks of phishing attacks and malware infections to a great extent. This is because it is difficult for hackers to break into multiple devices and access the keys.
- You always run the risk of losing your private key, and thus your funds, with a single-key mechanism. Multisig combinations allow you to access funds even if one key is lost. Let’s say you have a 2-of-3 multisig wallet. The private keys are stored on your laptop, phone, and tablet. You broke your tablet accidentally one day. Since the wallet requires only two keys, you can use the keys stored on the laptop and phone to unlock the funds.
- If the ownership of the crypto fund is shared among partners, multisig wallets require all (or the majority of) copayers to authorize withdrawals. No one party can hold or misuse the funds.
- Multisig wallets facilitate escrow transactions among agreed parties with the help of an arbiter. In case of a dispute, the arbiter can use her private keys to authorize or decline a transaction.
Disadvantages of a Multi-Signature Wallet
- While multisig wallets ensure enhanced security, it also leads to delays in transactions as multiple people and devices are involved.
- They demand some technical knowledge to set up.
- Since cryptocurrencies are in a regulatory gray area, it is hard to get legal help in case of a hack or theft. Multisig wallets make it more difficult when more than one wallet custodian is involved.