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What Are Multisignature Wallets?

Multisignature wallets let you choose the number of keys needed to unlock it and set a minimum number of keys that can do that together

In this article, we will explain what Multisignature Wallets are. We will also briefly cover their advantages and disadvantages and take a look at some of their use cases.

 

What Is a Multisignature Wallet?

The idea of Multisignature wallets appeared in 2012, the first ones being created and implemented a year later for the Bitcoin Blockchain. For more on crypto wallets, we recommend you watch our articles on this topic. 

To define a Multisig wallet simply, we could see it as a bank vault. From a technical point of view, to unlock such a vault, more than one key is required.

Therefore, a Multisig crypto wallet will allow you to choose the number of keys needed to unlock it and set a minimum number of keys that can perform that procedure together. For example, a wallet can be assigned 5 private keys to open it, with the minimum required key number being 4.

This kind of wallet includes additional features, besides the classic ones of a crypto wallet, allowing, for example, access to funds and transaction history for all those who own an assigned private key.

For advanced security, each user who owns a private key also receives a unique recovery phrase which they must keep safely to guarantee that the wallet can be accessed if necessary by the minimum number of private keys required.

Advantages and Disadvantages of Multisignature Wallets

The advantages of a Multisignature Wallet include the following:

  • Multisig wallets make cyberattacks more difficult by increasing the number of potential failure points that hackers encounter throughout this process.
  • A Multisignature Wallet helps eliminate the security issues that occur with a single-private key mechanism.
  • In addition, it eliminates the dependency on a single device. For example, one of the private keys can be saved on a smartphone, while another can be stored on a desktop, laptop, and so on.
  • Last but not least, using a Multisig Wallet will reduce the dependency on a single user.

As in any other situation, there are also disadvantages that come with such a wallet:

  • When there are several private keys, there is no legal custodian of the funds deposited in such a wallet, which is actually shared with several owners of private keys. In the case of an event with a negative impact, it is very difficult to get legal help. 
  • The speed of processing transactions suffers because, in order to sign them, it is usually necessary to access a device from a third-party source.
  • If it is necessary to recover a multisig wallet, this is a rather complicated process because it will be done by importing the recovery phrases on different devices.

Multisignature Wallets Use Cases

  • Enhanced Security

A Multisig Wallet provides users with the benefit of a higher and extra level of security for their funds. If one of the private keys is compromised, the user or users of the wallet can be assured that the funds remain safe.

Although cybercriminals are constantly developing new methods to steal crypto funds, the built-in technology will easily deter malware or phishing attacks. A hacker will not be able to hijack multiple associated devices at once and, therefore, multiple private keys.

  • Decision Making

If a business partnership between several people invests in crypto, such a Multisig Wallet will be very useful to control the access to the company’s common funds.

This way, each member of the partnership will hold a private key, but none will be able to misuse the fund or have full access to the holdings.

  • Escrow Transactions

The Escrow Transaction is a legal agreement, in which a third party controls money or assets until two other parties involved in the transaction meet certain conditions. Therefore, an Escrow contract constitutes a mediator that reduces the risk for both of the main participants in a transaction.

A 2-of-3 multisig wallet can facilitate these Escrow transactions between two parties, and the process will thus include a third party as an arbiter if something doesn’t go as planned.

  • Two-Factor Authentication

Since private keys can be stored on different devices, Multisignature Wallets can be used as a form of two-factor authentication.

However, there are also risks in this context, which will increase if the Multisig address is set to 2-of-2 private keys. If one of the keys is lost, access to funds will also be automatically lost.

Conclusions

Multisig Wallets use multiple private keys, and therefore multiple signatures, to validate transactions and transfer funds, allowing for unanimous decision-making and thus providing increased security.

If used properly, they allow for many useful applications, which make crypto assets more attractive to investors, and therefore, they are a much safer and more credible alternative to crypto fund management.

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