In this article, we’ll be covering aspects such as how a multisig wallet works, its types, how to create a multisig wallet for different cryptocurrencies, its advantages and disadvantages, as well as its use cases and future prospects.
As cryptocurrency evolves and becomes more popular, securing it has become more critical. With wider acceptance of crypto as a digital asset and something of immense value in the world, the number of hack attempts and cyber threats to it and its holders has also increased.
To put this in perspective, generally, on average, every 11 seconds, some person falls victim to a cyber attack. Even governments are not spared; in the month of October 2024, a US Government-linked crypto wallet was hacked and over $20 million worth of Ethereum, USDC and USDT stablecoins were swiped. To counter such incidents, enhanced security measures need to be taken, and that brings us to our current topic: multi sig wallets.
Multisig wallets are emerging as a potent solution to the security challenges faced by the crypto community. The fact that these wallets require multiple approvals before a transaction can be carried out is a deterrent in itself; however, it has many other benefits, which we’ll discuss moving forward.
The usefulness of this tech can be gauged as many in the crypto world are already taking notice. For example, BlockGuard is pioneering the use of multisig crypto wallets and on-chain 2FA to safeguard assets, creating new, more trustworthy standards for digital and decentralized asset security.
What is a multisig wallet?
A multiple signature wallet is designed for crypto assets that require two or more keys to allow transactions. This is a level-up from the traditional single-signature wallets that are mainly used today, which require only a single key to allow authorization. So, from the get-go, the process offers high security as multiple people or devices are required for it to work.
How does a multisig wallet work?
Having discussed that a multisig wallet requires two or more authorizers to carry out transactions, let’s check out some of its other components. We will look at how these components work together to make these wallets extra secure.
Private keys
Keys in crypto assets are essentially secure codes that allow people to manage their funds. In a multisig setup, multiple private keys are generated and distributed among different parties or devices. For a transaction to be valid, a predetermined number of these keys must be signed off.
Understanding N-of-M
N-of-M can be considered as settings that are at the heart of how multisig crypto wallets work. N is the required number of signatures, and M is the total number of keys that have been generated.
Let’s elaborate on this further. If there is a 2-of-2 configuration, that means both private keys must sign off, and a 2-of-3 means that two out of three keys are required. A 3-of-5 means any three out of five keys must be used to allow authorization of the transaction. This flexibility allows users to tailor the security level according to their needs, balancing accessibility with protection.
Here’s a simple transaction process with a multisig wallet
- Initiation → a transaction is initiated by one of the key holders
- Signature gathering → the transaction request is sent to other key holders for approval
- Verification → once the required number of signatures is collected, the transaction is verified
- Execution → the transaction is executed on the concerned blockchain network
This multi-step process ensures that transactions are heavily scrutinized and approved by multiple parties before actually happening.
Types of multisignature wallets
There are different types when it comes to multi signature wallets; each providing different security levels and configurations to its users.
1. Software multisig wallets
Software multisig wallets are applications for computers and mobile devices. They are used to create a multisig crypto wallet. They are considered more user-friendly, provide accessibility across multiple devices and offer support for multiple crypto assets
Electrum is a popular software wallet that supports multisig Bitcoin wallets.
2. Hardware multisig wallets
Next, we come to hardware wallets, which are physical devices for storing private keys. The air gap that such wallets provide is an added security level as the keys stored in them are not on any network or online most of the time.
Ledger multisig is a hardware-based wallet that offers a combination of offline physical storage and a multisig configuration. For example, using three Ledger devices in a 3-of-5 multisig configuration ensures that even if one, or at max two, devices are lost or compromised, the funds remain secure.
| Active Portfolio Management | Passive Portfolio Management |
|---|---|
| Frequent buying and selling of assets | Holding of the assets for longer |
| High risk | Low risk |
| High returns | Slow returns but expected long-term growth |
| Requires high levels of monitoring | Requires low levels of monitoring |
| Isn’t easy to diversify | Has a lot of room for diversification |
| Altcoins are a great example | Stablecoins are a great example |
| Involves FOMO and panic selling | Doesn’t involve FOMO or panic selling |
| Best for experienced and seasoned investors | Perfect for newbies and busy individuals with not much time on hands |
| Can lead you to be in stressful situations | Is not likely to cause any stress |
3. Ecosystem-specific multisig wallets
Since there are different blockchains, they have their own ecosystems. There are multisig crypto wallets that are custom-made for certain blockchains to facilitate seamless operations in their respective networks.
- Solana multi sig → custom-made for the Solana blockchain to provide efficient transactions with low fees
- Ethereum multi sig → similar to the Solana blockchain, there are platforms such as Gnosis Safe that support multisig for Ethereum ERC-20 tokens
- BlockGuard multi sig → Also custom made specifically for its network of DeFi products, offering multi-sig capabilities as well as on-chain 2FA
General guidelines on how to create a multisig wallet
Whether you’re safeguarding personal assets or managing funds as a group, understanding how to set up a multi signature wallet is crucial for enhanced control and collaboration. Let’s look at two popular options with their examples.
How to set up an Ethereum multisig wallet
1. Choose a wallet provider → You need to choose a platform. Gnosis Safe and MyCrypto are some of the companies that offer multi signature wallets on the Ethereum network.
2. Install the wallet or access the web interface → You can choose to download an app from the wallet or use a web browser to access it.
3. Create a new wallet → In order to make the wallet, you will initiate the process and specify the number of owners (M) and the required number of authorizers (N). Make sure you are certain, as this will be critical for your future transactions.
4. Add owners → You will need to add the owners’ Ethereum addresses. All owners should have their own separate Ethereum wallets.
5. Review and deploy → Give your selected options and inputs a once-over to make sure they are correct and meet your requirements. Then, proceed to deploy the smart contract on the Ethereum blockchain. (please note there might be charges for this)
6. Secure private keys → Always keep your private keys secure.
How to set up a Bitcoin multisig wallet
1. Select a wallet application → You will need to select a platform that works with Bitcoin multisig configurations. For example, Electrum and Armory.
2. Initiate multisig setup → Select the multisig option and specify the N-of-M settings (e.g. 3-of-5)
3. Generate key pairs → Every owner/user of the wallet needs to generate a key pair (public and private) in the wallet application.
4. Share public keys → Participants exchange public keys, ensuring private keys remain confidential.
5. Create a multisig address → The platform usually combines the public keys to generate a multisig address where funds can be sent.
6. Test the setup → Perform a small test transaction to ensure everything functions correctly.
Advantages of multisig wallets
Having gone through how a multi signature wallet works, let us look at its benefits.
1. Increased security
Having multiple owners/authorizers helps curb the risk of unauthorized access since more than one signature is required to allow the transaction to take place.
2. Single point of failure is nullified
Since multiple parties are involved, the single point of failure issue is automatically mitigated. So, even if one of the keys is lost or stolen, operations can still continue while staying secure.
3. Trust in transactions is promoted
Like in a multisig escrow arrangement, funds are held securely until all parties agree to release them.
4. Flexible access control
Customizable N-of-M configurations allow users to tailor the security level.
Disadvantages of multisig wallets
Nothing is perfect, and even with all the useful advantages, these wallets also have their drawbacks. We have listed them below.
1. The setup is complex
Compared to traditional wallets, multisig is relatively more difficult than setting up a standard wallet; the complexity can increase the chance of user errors.
2. Time taking
Since multiple signatures are required for authorization, the entire transaction process can take a lot of time. It’s not the best way when you need to make transactions urgently.
3. The cost is higher
The data size of multiple signature wallets is greater than regular wallets, so some networks charge more for their use.
4. Management challenges
Since multiple entities are involved in the authorization of transactions, and if you add multiple crypto wallets to that, the entire process becomes tedious.
Multisig wallet use cases
1. Corporate fund management
Corporations and companies use multiple signature wallets so that transactions can be more secure and done with the authorization of several executives to provide better oversight.
2. Multisig escrow accounts
Where transactions are of a sensitive nature or might exceed a certain limit. The amount might be managed by a neutral third party (held in escrow.) In these cases, approval might be required from both buyer and seller and possibly the neutral third party.
3. Decentralized team funds
DAOs (Decentralized Autonomous Organizations) and project management teams manage communal funds securely using multisig crypto wallets.
4. Personal security for high-net worth individuals
Having multiple keys that are shared across multiple devices and trusted parties can work as a potential hacker deterrent and provide better security.
The future of multisig wallets
As we reach the end, let us conclude with the following – the future of the multisig wallet is promising. We have already discussed how critical the security aspect of crypto has become since more governments, businesses, and individuals continue to adopt the crypto economy. It is a given that new and enhanced security measures will be utilized to secure digital assets.
Furthermore, innovations like BlockGuard’s multisig solutions are enhancing the domain of multi signature wallets. The integration of two-factor authentication (2FA) and biometrics—can further enhance security.
Also, as this technology becomes more widely utilized, we’ll see further work being done to limit its drawbacks and disadvantages. Improving interfaces will make the multi-sig wallet easier to use and more accessible to non-technical users. At the same time, the widespread use of multisig will help lower the higher costs associated with its use due to competition and innovation in technology.
Source : blog of blockguard