In the realm of cryptocurrency, security is of paramount importance. To address this concern, multisig wallets have emerged as a powerful solution. By requiring multiple signatures for transaction authorization, these wallets provide an extra layer of protection against potential threats.
In this guide, we will delve into the concept of multisig wallets, understanding their functionality, advantages, and how to set them up. Join us as we unlock the world of multisig wallets and empower you to take control of your digital assets with heightened security.
Understanding the concept of multisig wallets
A multisignature (multisig) wallet is a type of digital wallet that introduces an enhanced layer of security for its users. It operates on the principle of requiring multiple distinct signatures, hence the term “multisig”, to approve and carry out a transaction. In comparison to a conventional single-signature Bitcoin wallet, which possesses a single Bitcoin address with one corresponding private key that grants the keyholder full authority over the associated funds, a multisig wallet implements a radically different approach.
In the world of multisignature Bitcoin wallets, a Bitcoin address could be linked to three or even more private keys. In order to authorize a transaction and spend the funds, any two of these keys must be utilized. This added requirement increases the level of security around the user’s funds.
Each private key acts as a secure gateway to a user’s funds, establishing proof of ownership of the Bitcoins and playing a crucial role in authorizing transactions in conjunction with a public key. However, it’s worth noting that if a private key goes missing, it results in the irrevocable loss of all the funds associated with it, as there’s no established way to retrieve them.
It’s interesting to note that the principle of multisig does not find its roots solely in the cryptocurrency sector. This concept has been a part of the traditional banking system for years, and even predates that. Thousands of years ago, it was used to safeguard the valuable relics of saints stored in crypts. The monastery’s head would distribute only partial keys to monks to grant access to these relics. Consequently, no individual monk could access and potentially misappropriate the relics on their own.
This deep-seated history of multisig systems provides a historical and practical precedent for its current use in the realm of cryptocurrency, specifically Bitcoin, to protect users’ assets. The multisig wallet, thus, represents an innovative blend of traditional security measures and modern technological advancements, offering its users an improved standard of digital asset protection.
A comparison between multisig and single-key wallets
Most Bitcoin wallets in circulation today operate on a single signature configuration. This structure requires just one signature to authenticate a transaction. Single-key wallets offer simplicity and faster access to funds, however, they also serve as a single point of vulnerability, making them an easy target for hackers and nefarious elements.
Single-key wallets can be quite suitable for executing smaller, quick transactions, such as face-to-face payments. Despite their convenience, these wallets are generally not recommended for individuals or enterprises needing to store substantial quantities of Bitcoin. Much like physical cash, if you were to lose access to a single-key wallet, your funds would become irretrievable.
In contrast, a multisig wallet operates on a multiple keys setup. This structure mandates the use of a combination of keys from various sources for a transaction to be validated – for instance, a 2-of-3 setup requires at least two out of three keys to execute transactions. This setup introduces a multitude of variations, with different combinations of signatures required to access funds and validate transactions. Some highly secure solutions even necessitate the use of all private keys to form the signature and authenticate a transaction.
It’s worth mentioning that multisig solutions have been part of the Bitcoin landscape for quite some time. The concept was integrated into the standard Bitcoin protocol as early as 2012. However, it only started gaining popularity in 2014 following the downfall of Silk Road and the collapse of the Bitcoin exchange Mt. Gox. These two negative events motivated developers to advocate for enhanced security measures against hacks and seizures by authorities.
Setting up a multisig wallet
In a multisig wallet, there’s no hierarchy among private keys. What matters is the number of keys required to sign the transaction, irrespective of the order. Here is a brief overview of how multisig wallets work:
- Step 1: Begin by connecting the hardware device to an existing wallet or set up a new wallet.
- Step 2: Wait for the wallet to detect the hardware device, then proceed to sign. Next, connect a secondary hardware device and follow the same procedure. Finally, link a third wallet and sign similarly as done with the previous devices.
- Step 3: To carry out a transaction, you will only require two out of the three wallets set up in the steps above.
While it’s feasible to employ software wallets, we will focus here on the configuration of hardware wallet setup.
Set up three hardware wallets
You have the option to use three hardware wallets, either from the same or different manufacturers. As long as you can safely and securely store each seed phrase, the multisig setup will function with any mix of hardware wallets you select. The setup process for all hardware wallets generally follows the same steps:
- Ensure that the packaging of the hardware wallet hasn’t been tampered with.
- Link your hardware wallet device to a secure computer that’s free from viruses.
- Adhere to the prompts appearing on the hardware wallet screen and computer. Depending on the specific hardware wallet, you might have to download the manufacturer’s desktop app for the setup. Some hardware wallets may simply require you to use a web browser.
- You will be asked to note down the seed phrase (at least twice). It’s critical never to type your seed phrase into a computer, unless you’re using a verified desktop app to recover a wallet.
- Repeat this procedure for each of the remaining devices.
Install your preferred desktop wallet app for multisig
While configuring a hardware wallet, you will also need the manufacturer’s desktop app (known as a bridge) or a web browser for basic setup. These desktop interfaces typically do not support a multisig feature. For instance, Trezor advises users to download other desktop wallets such as Electrum for multisig. These desktop wallets can also be used with other devices like Ledger, Coldcard, and KeepKey in place of the standard desktop interface.
After establishing backups of all three multisig master public keys – one for each device – it’s crucial to save this information onto an external storage medium, such as an SD card or hard drive. Should one of the devices be misplaced, these backups will enable the restoration of your multisig wallet. Store these backups in a secure, undisclosed location for safety.
Receiving funds is akin to the process with a single hardware wallet. After a public address is generated, funds can be received from another wallet or an exchange to this address. Similarly, the process for sending funds is nearly identical, except that confirmations for sending funds require signatures from two devices rather than one. The combination and order for signing the transaction are flexible.
The benefits of using multisig wallets
When it comes to safeguarding your funds, particularly with cryptocurrencies like Bitcoin, an abundance of caution is warranted. Malicious actors are always on the lookout for security vulnerabilities to exploit.
Multisig wallets offer enhanced security by averting a single point of failure. If a private key is lost, your funds aren’t, thanks to a safe backup of different private keys stored across various devices and locations.
Protection against cyber-attacks is another added layer of security in multisig wallets. With multiple points of safety, the wallet becomes increasingly difficult to breach, making it nearly impenetrable.
Multisig wallets function akin to a trustless escrow to finalize transactions. Although this may seem contrary to Bitcoin’s ethos of decentralization, there are a couple of crucial differences. The choice to use an escrow is voluntary, and the chosen escrow can be altered as required.
Two-Factor Authentication (2FA)
The requirement of multiple signatures serves as a form of two-factor authentication, similar to those employed by various online services. This ensures the funds cannot be accessed or spent without the authorization of another signature. This setup, known as a 2-of-2 multisig protocol, keeps the private keys on two different devices.
Collaboration Between Parties
Multisig wallets serve as an ideal solution for businesses, where different entities can view balances, but to access and transfer funds, authorization from at least two sources (private keys) is required.
THE DRAWBACKS OF MULTISIG WALLETS
Despite the heightened security that multisig wallets offer, they do come with their own set of limitations and risks, including potential legal issues should a transaction go awry.
Multisig wallets tend to have slower transaction speeds due to their reliance on multiple parties to authorize a transaction. This issue can be mitigated by using a faster single-key hot wallet for immediate transactions and reserving the multisig wallet for larger Bitcoin holdings that require better protection.
Setting up a multisig wallet does require some level of technical understanding, which can be intimidating for many. However, ample resources are available online to assist, and many Bitcoin custodial companies provide proactive support to help customers set up their multisig solutions.
Fund recovery in multisig wallets can be technically demanding, especially for users not well-versed in technology. This process requires the import of each recovery phrase onto each different device, which may pose a challenge. However, the prospect of potentially losing funds from a single-key solution should be a greater deterrent, emphasizing the importance and utility of multisig wallets.
In the fast-paced world of cryptocurrencies, protecting your digital assets is of paramount importance. Multisig wallets offer a powerful solution by introducing an extra layer of security through the requirement of multiple signatures. By distributing private keys across different devices, multisig wallets significantly reduce the risk of unauthorized access or theft. They enable businesses and individuals alike to take control of their financial future with increased confidence. Embrace the power of multisig wallets and elevate your security measures to safeguard your digital wealth.