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JANUARY 14 2022

Multisignature Wallets - Better Protection For Your Cryptocurrency?

By this point, multisignature (multisig) is an already well-established security measure in a blockchain environment with both benefits and disadvantages to its name. With the Taproot upgrade, which introduced improvements to Bitcoin scripts meant to support multisig transactions, it recently received even more attention. Let’s explore both sides of the coin and take a closer look at multisignature wallets.

What is a multisig wallet?

As the name suggests, multi-signature is a specific type of digital signature that allows two or more users to sign documents as a group. A multisig wallet is a cryptocurrency wallet that requires two or more private keys to confirm a transaction depending on how many owners or “copayers” the wallet has. These wallets are also quite often referred to as “vaults”, the term which also works pretty well as a simplified analogy for the entire process. 

Imagine an impenetrable bank vault with two locks and two unique keys, each key belonging to a different owner. To open the vault both key holders have to use their keys simultaneously otherwise it won’t budge and neither of them can withdraw any funds without the approval of the other party.  

A multisig wallet works on the same principle. Multiple signatures from different addresses are needed for a transaction to be executed. The number may vary depending on wallet configuration, you can choose the minimum number of keys needed to authorize the transaction, which doesn’t have to be identical to the number of copayers. For example, 2-of-3 configuration requires only 2 signatures out of 3 addresses to authorize the transaction.  

Why use multisig wallets?

The main answer is without a doubt an unquestionable increase in security of crypto assets management (if used correctly, but we will return to this point later). While it makes sense for a “recreational” trader to store their cryptocurrency in a standard, single-key address, as they are faster and easier to use, the same thing doesn’t apply to larger projects.  

Multisig storage method is often used by companies and organizations for several reasons. Primarily, it greatly helps to avoid a single point of failure. Not only splitting responsibility of ownership of an address and its funds between multiple people, it also safeguards against the situation when funds become inaccessible due to loss or compromisation of private keys. The perfect example being the infamous collapse of QuadrigaCX exchange, when around 75,000 customers suddenly lost fortunes due to sudden death of Gerald Cotton – the CEO and the sole possessor of the cryptographic keys to the exchange’s wallet. 

Human factor aside, multisignature wallets also reduce the dependency on one device. Users can save one private key in their mobile phone and another on their desktop or laptop. As a result, it makes potential cyberattacks more difficult. Theoretically, multisig even allows you to create a kind of an authentication mechanism similar to 2FA, but we wouldn’t recommend that option considering how difficult it can be to recover the multisig wallet. Venture this way only if you know what you are doing. Which brings us to another section of this article. 

Disadvantages of multisig wallets

As explained above, there are many benefits associated with multisig wallets. However, no mechanism is ever entirely perfect and there are still some risks and limitations worth mentioning. 

First of all, setting up a multisig wallet from scratch is not easy and requires a certain level of technical skill. Therefore, if you wish to take advantage of the multisig’s benefits but lack the knowledge, your best bet is to rely on third-party services. A secure crypto wallet’s main job is to protect against two scenarios: access to the wallet by bad actors and loss of access for good actors. 

Speaking of which, if the worst-case scenario happens and wallet becomes inaccessible, no matter if it is because of a compromised key by malicious hackers or you simply had an argument with your copayer business partner, there are no legal custodians of funds deposited into a shared wallet with multiple keyholders. It can be difficult to seek legal help considering the decentralized and irrevocable nature of blockchain technology. 

Last thing worth mentioning is the transaction speed of multisig wallets, which can be quite slow depending on wallet’s configuration and a number of required signatures. This is especially true with escrow transactions that include a third party as a mutually trusted arbiter in case of a dispute.

Final thoughts

Multisignature is arguably one of the most secure and fail-proof ways to store cryptocurrency today if used correctly and with caution. When it comes to blockchain “not your keys, not your coins” is a common maxim we should always keep in mind.