Multisig wallet is a wallet where funds are managed by multiple partners. Multisig is an abbreviation of multi-signature. It’s a provision where multiple partners agree to manage a single wallet through their digital signature. The funds in this wallet are authorized only if the majority of them from an agreed set of partners give a go-ahead. The multisig wallets cannot be accessed by one person at a single time and give an additional layer of security for customers’ funds. For instance, a man is running a shop in partnership with his friend. They both have installed a safety locker in the shop to keep confidential documents and necessary funds. The locker has two locks with their respective keys. Each partner has one key with them. The only way to open the locker is to unlock it with both the keys at the same time. Therefore, one cannot open the locker without mutual consent. The technology was first used by Bitcoin in 2012 and was later adopted by several other providers.
Multisig wallet & its Several Combinations
There are several combinations of multisig wallets. These combinations work depending on the number of partners and the nature of its accessibility. Let’s take a look at some of the popular combinations.
1-of-2 Key – In this combination, two partners will have a joint account where one’s signature is sufficient enough to access the funds.
2-of-3 Key – This combination has multiple scopes and can be used according to the requirement set by the partner involved.
- Scope 1 – An account maintained by A, B, and C where A can spend the money with either B or C’s approval. Here money cannot be taken away from A unless B and C agree to the same.
- Scope 2 – An account maintained by 3 group heads where funds can be accessed only if 2 group heads give their consent. Such accounts are mainly used by an organization and the combination can increase like 3-of-5 Key, 5-of-9 Key, etc. This depends on how many partners are managing the account. The idea here is that funds can be accessed only after the majority’s approval.
- Scope 3 – This is mainly used in businesses for having a more secure wallet. Here an exchange platform stores the first private key online and the second as a paper backup. The third key is stored online by a security firm who will sign the transaction after checking the preset criteria like not more than an X amount withdrawn, adhere to regulatory norms, etc. The idea here is that even if the exchange platform or security firm’s account is hacked individually, the funds cannot be stolen. And, even if the security firm vanishes without a trace, the funds can be accessed by the paper backup key.
How to Create a Multisig Wallet?
All the co-partners involved must use the same platform. Each wallet will have their respective auto-generated seed and the Master Public Keys (MPKs) of the other co-partners. It is likely that each of them will create their wallet at different times depending on their convenience. Hence, the process can be divided into 5 main steps.
- Step 1 – Generate your seed and MPK
- Step 2 – Give your MPK to your co-partner
- Step 3 – Receive your co-partner’s MPK
- Step 4 – Create the final wallet
- Step 5 – Verify the addresses that you & your co-partner are getting is same
Some of the best examples of multisig wallets are Bitcoin QT and Electrum.
The Security Benefits of Multisig Wallet
The funds remain safe in multisig wallets even if a single private key is lost. For instance, A has opted for a 2-of-3 key multisig wallet and has stored each private key in separate devices like mobile, laptop, and desktop. In this scenario, even if A’s mobile is lost, the thief cannot access the funds by using a single private key and A can still access the funds using the other two keys.
Two-factor authentication – The user can create a multisig wallet that requires two private keys. One can only access the funds if he/she has access to both the keys at the same time. It is recommended to use the Google Authenticator to receive OTP on your mobile as one of the private keys. Enabling this process comes with its own risk. A user cannot access the funds if one of the private keys is lost. Hence, it is advised to take backup codes to remain on a safer side.
Escrow Transactions – The users opt for a 2-of-3 Key multisig wallet where an escrow transaction is between A and B. The third-party C joins them as a mutually trusted arbiter in case of any dispute. Here, first A has to deposit the funds which would automatically lock up. If B provides goods worth the deposited funds, both can complete the transaction using their respective keys. And in case of any dispute, C will step-in to give his/her key to either A or B depending on the nature of the disagreement. The arbiter also can’t access the funds as he/she has only one key.
It is extremely important to know the other side of the coin. The multisig wallet comes with its own set of limitations as setting it up, needs some technical knowledge if one doesn’t want a third-party involvement. There is no legal caretaker of the funds deposited in wallets. Hence, it is difficult to solicit legal assistance if anything goes wrong. Despite these, the use of multisig wallets will witness a rapid rise in the future. The technology is highly recommended because of its interesting applications and enhanced security measures.