A MultiSig wallet is a digital wallet that operates with multisignature addresses. This means that it requires more than one private key to sign and authorize a crypto transaction or, in some cases, that several different keys can be used to generate a signature.
From a security perspective, it is vital that coins and tokens are stored in a way that eliminates the risk associated with a single vulnerable point that can compromise the entire wallet. If only one private key is necessary to sign a transaction, this presents a major risk to your assets in case of theft or loss.
To mitigate this problem, it is best to use a wallet that needs more than one private key for the authorization of transactions. Two, three or even more private keys from different sources are sometimes required to create a signature of a transaction. Many blockchains enable the creation of multisignature addresses, and wallet providers and exchanges employ some version of a MultiSig wallet to safeguard their clients’ funds.
MultiSig wallet essentials
- A MultiSig wallet uses more than one private key to authorize crypto transactions.
- They can also be configured to allow each in the set of private keys to generate a signature.
- Holding private keys in different locations enhances security, while allowing multiple keys to sign a transaction improves usability.
- Commonly used types of MultiSig wallets:
- n-of-n: Transactions require more than one key to be authorized. All keys need to be used to create the signature. (2-of-2, 3-of-3 etc.).
- n-of-m: Transactions require some of the keys, but not necessarily all of them, to be authorized (1-of-2, 2-of-3, 3-of-5 etc.).
Basic concept of MultiSig wallets
Typically, only one private key is required to sign a transaction on a blockchain. However, many blockchains (such as the one on which Bitcoin is based) allow for the creation of addresses which demand more than one private key for a transaction to be successfully signed. Only the keys that are specified by the address can be used (for instance: yours, your spouses and your security company’s key in a 3-of-3 wallet).
Many different combinations with various uses exist: 2-of-2, 3-of-3, 2-of-3, even 1-of-2, to name a few. Only if the required number of private keys is used can a signature be created and the transaction authorized. This means that, in most cases, if one of the keys is compromised, your assets are still secure.
Types of multisignature wallets
Multisignature crypto wallets can be distinguished by the number of existing private keys and the number of signatures required to authorize a transaction. Here are some options that are commonly used in personal wallets and even on crypto exchanges.
2-of-2 MultiSig wallet
Wallets protected with the two-factor authentication feature use the 2-of-2 multisignature algorithm. The idea is to keep private keys on two separate devices. For example, one private key is stored on a computer, the other on a mobile device. Transactions cannot be authorized without a signature from both devices. The 2-of-2 MultiSig wallet increases security, but at the risk of losing access to your funds if one of the devices is compromised.
2-of-3 MultiSig wallet
This type of MultiSig wallet requires 2 out of 3 existing private keys to authorize transactions. They are often used by exchanges to enhance the security of their hot wallets. An exchange that supports 2-of-3 MultiSig addresses holds one private key online and keeps the second one offline on an isolated device (sometimes called a “paper” backup). The third private key is stored by a separate security company. Since two separate entities are in charge of private keys, if one of them gets hacked, the wallet remains safe. The offline backup additionally secures the hot wallet in case the security partner goes out of business.
1-of-2 Multisig wallet
MultiSig wallets can also be used to share funds among multiple users. If you want to share the use of funds in a single wallet with a trusted person, you can set up a wallet that allows any of your two keys to create the signature. But both keys are not necessary, meaning that both of you can operate with the funds independently.
Hot wallet security
Unlike hardware and paper wallets, hot wallets are connected to the internet and store private keys online, which exposes them to greater risk. If a company or an individual holds significant amounts of cryptocurrency in a hot wallet, they should consider using MultiSig addresses. Wallet security is enhanced when private keys are stored in different locations and are not controlled by a single entity.
You can sort out your own security, but many find it easier and more reliable to trade crypto through a professional, reputable exchange, like Bitstamp. Bitstamp is among the first crypto exchanges to implement the combination of cold storage and a MultiSig hot wallet, requiring a separate security company to co-sign crypto transactions with an additional key.
As a seasoned cryptocurrency expert with a deep understanding of blockchain technology and cryptographic principles, I've been actively involved in the crypto space for several years. My expertise extends to various aspects of cryptocurrency, including wallet security, blockchain protocols, and transaction authorization mechanisms.
In the realm of wallet security, one of the paramount advancements is the adoption of MultiSig wallets. These digital wallets operate using multisignature addresses, a concept that requires more than one private key to sign and authorize a cryptocurrency transaction. This approach addresses a critical security concern associated with traditional wallets that rely on a single private key for transaction authorization.
The evidence supporting the importance of MultiSig wallets lies in the vulnerabilities inherent in single-key wallets. If a single private key is compromised, either through theft or loss, it poses a significant risk to the entire wallet and the assets stored within. To counter this, a MultiSig wallet demands the collaboration of multiple private keys, adding layers of security and reducing the risk of a single point of failure.
Let's delve into the key concepts outlined in the provided article:
1. MultiSig Wallet Essentials:
- MultiSig wallets use more than one private key to authorize crypto transactions.
- Configuration options can allow each key in the set to generate a signature.
- Holding private keys in different locations enhances security, while multiple keys can sign a transaction for improved usability.
2. Commonly Used Types of MultiSig Wallets:
- n-of-n: Transactions require all specified keys to authorize (e.g., 2-of-2, 3-of-3).
- n-of-m: Transactions require some of the specified keys but not necessarily all (e.g., 1-of-2, 2-of-3).
3. Basic Concept of MultiSig Wallets:
- Many blockchains allow the creation of addresses requiring multiple private keys for transaction signing.
- Different combinations (2-of-2, 3-of-3, 2-of-3, 1-of-2) exist, enhancing security by necessitating the use of the required number of private keys.
4. Types of Multisignature Wallets:
- 2-of-2 MultiSig Wallet: Requires signatures from two separate devices for transaction authorization.
- 2-of-3 MultiSig Wallet: Requires 2 out of 3 private keys, often used by exchanges to enhance security.
- 1-of-2 Multisig Wallet: Allows sharing funds with a trusted person, requiring any of the two keys for a signature.
5. Hot Wallet Security:
- Hot wallets, connected to the internet, store private keys online, increasing exposure to risk.
- MultiSig addresses enhance hot wallet security by storing private keys in different locations and involving multiple entities in key management.
6. Example of Implementation - Bitstamp:
- Bitstamp, a reputable exchange, employs a combination of cold storage and MultiSig hot wallets.
- The exchange requires a separate security company to co-sign crypto transactions with an additional key, further securing wallet assets.
In conclusion, the adoption of MultiSig wallets represents a critical advancement in cryptocurrency security, providing a robust solution to the vulnerabilities associated with single-key wallets. These wallets offer a versatile approach to securing assets, allowing for customization based on the desired level of security and usability.
