What Is A Multisig Wallet?

By September 12, 2022September 15th, 20224 minute read

For crypto owners, security has always been a critical issue. Safety regulations and the reliability of cryptocurrency wallets are frequently raised issues, as they pose serious risks to the money that might be altered with or stolen by hackers.

A multi-signature wallet is one of the ways to stop such loss. This article contains the basics of multisig wallets and their pros and cons.

What is a multisig wallet?

A cryptocurrency wallet known as a MultiSig wallet (Multi-Signature wallet) involves the usage of two or more private keys to sign and approve transactions. Here, a group signature on a document must include two or more signatories. T the signatories and joint owners of a shared multisig wallet are known as “copayers.” This structure is beneficial for businesses that keep or own large sums of funds.

Depending on the type of wallet, a transaction may require a different number of signatures. It can be less or the same as the number of wallet copayers.

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Key features of multisig wallet

  • The wallet’s funds and transactions are visible to every copayer.
  • At least one copayer must sign the transaction to send money from the wallet. Due to this function, your money is more secure.
  • A different wallet recovery phrase is there for each of the copayers. There could not be enough copayers to sign transactions if one of the copayers’ recovery phrases is forgotten. You cannot use the wallet’s money if there are not enough copayers to sign transactions.

What are the different key combinations you can have?

Although multi-signature technology was around long before the emergence of cryptocurrencies, it is most frequently linked to the invention of Bitcoin. In particular, multi-sig wallets were widely accessible the following year after the Bitcoin network first used the technology in 2012.

There are several vital combinations depending on how a multi-sig address is set up:

  • 2-of-3: A three-signature wallet can be accessed with just two signatures.
  • 2-of-2: A two-signature wallet can only be accessed with both signatures.
  • 3-of-3: A three-signature wallet can only be accessed with all three signatures.
  • 3-of-4: A four-signature wallet can only be accessed with three signatures.

Irrespective of the precise configuration, multi-sig wallets all attempt to increase security.

How does a multisig wallet work?

Regardless of how many key holders you have, using a multisig wallet always involves the same fundamental steps. It begins when one person chooses to use their wallet to complete a transaction. Then, they submit their transaction information in the wallet and sign the transaction with their key.

The deal hasn’t been completed yet, though. So until all necessary keys sign the transaction, it will be a pending transaction. The wallet signs the transaction and delivers the money to the designated address once the correct number of keys has been entered.

Multisignature wallets lack a hierarchy. No particular signature is required to complete a transaction, for instance, if the multisig wallet needs three out of four private keys to confirm it. Instead, the transaction can be signed by any four out of the five users in any order. Transactions are perpetual. Transaction proposals that are still pending won’t be complete until all necessary signatures have been provided.

Benefits of multisig wallet

  • Security & Accessibility: Multi-sig wallets provide robust security while preventing issues brought on by the theft or loss of a private key.

  • 2-Factor Authentication (2FA): Two different accounts don’t need to have two private keys. One user can choose 2FA and control two wallet keys. It should be mentioned that if you lose one of the keys, you won’t be able to access your wallet and risk losing your money.

  • Joint Decisions: A multi-sig wallet enables board members to access a company’s funds because it prevents every individual from secretly withdrawing funds.

Limitations of multisig wallet

  • To set up a multisig wallet, you should have technical expertise.
  • No legal custodians of money are placed into a multi-keyholder shared wallet. Due to the relatively new concepts of blockchain and multisig addresses, it may be challenging to obtain legal assistance if something goes wrong.
  • Transaction speed is frequently slow. Multisig relies on a third party, a device, or a specific location to access the wallet and sign the transaction, which slows down the process.
  • In a multisig wallet, recovering data is a tedious task. Each recovery phrase needs to be imported onto a different device.

Need of multisig wallet

One private key makes it a lot simpler to access a wallet, but losing that key could cause you problems. Anyone who has your key could retrieve your crypto assets and use the same key to transfer them out of your wallet.

Additionally, business transactions using cryptocurrencies necessitate numerous permissions. Such asset transfers would not be appropriate for a single-signature wallet. It’s most definitely not the right course of action to give one individual sole custody of significant amounts of money by giving them the key.

When escrow transactions are carried out, multi-sig wallets are particularly helpful because a third-party custodian is involved and cannot be given sole control of the cash. Multi-sig wallets resolve these issues with asset protection and security.

Conclusion

Multi-signature wallets are a far more reliable and highly secure choice for managing cryptocurrency funds after weighing the pros and cons. Furthermore, if properly utilized, multisig wallets offer a wide range of beneficial applications that increase the allure, utility, and security of Bitcoin and other cryptocurrencies.

Multisig wallets increase security by requiring several signatures to transfer money and enable unanimity in decision-making; without a doubt that this technology is going to have more significant usage.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
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Harshita Shrivastava

Harshita Shrivastava

Harshita Shrivastava is an Associate Content Writer with WazirX. She did her graduation in E-Commerce and loved the concept of Digital Marketing. With knowledge of SEO and Content Writing, she knows how to win her content game!

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