What Are Multisig Wallets?

Multisignature wallets, or multisig wallets, offer enhanced security for cryptocurrency holders. They are ideal for advanced users who need to manage funds as a group. With security being a common concern among cryptocurrency users, multisig wallets are one of the most advanced security tools available. When keys are properly stored, multisig wallets can help eliminate the single point of failure that traditional single-key wallets face.

Read on to learn about multisig wallets, how they work, the various types available, and when to use them.

What Is a Multisig Wallet?

A multisignature wallet uses multiple private keys to access or transfer cryptocurrency assets. The parties use smart contracts to determine the access rules for the wallet. Multisig wallets provide a version of multi-factor authentication. This feature is especially relevant when the assets belong to multiple parties in a company or a decentralized autonomous organization (DAO).

including the minimum number of keys. These wallets are a seedless form of self-custody since the owners govern them on-chain based on the rules established in the smart contract. Multisig wallets differ from traditional wallets that are user-controlled endpoints.

Types of Multisignature Wallets

The number of keys required for a transaction distinguishes the various types of multisig wallets.

1-of-2 Signatures

Two parties that trust each other can use this multisig wallet to share funds without requiring the authorization of the other.

2-of-3 Signatures

This is one of the most popular multisig wallets. It requires two private keys to execute a transaction. A common practice is to have one key online, another offline, and the third with a security company.

3>All Private Keys Required

All three multisig wallet types above are threshold signature wallets. You can set the smart contract to require all private keys for access. If the predetermined number of signatories is five, all five keys are required to validate any transaction.

Pros & Cons of Multisig Wallets

Pros

• Adaptability: Users can edit the multisig wallet’s smart contract anytime as needed.
• Transparency: The smart contracts are open source, meaning anyone can audit the code to gain insight into the parties controlling the fund. In group settings, such as DAOs, members can audit the smart contracts periodically to ensure the funds are secure.
• Key Person Risk Elimination: Multisig wallets ensure access is possible with the remaining keys even if one key becomes inaccessible. This minimizes the risk of exit scams since access requires the cooperation of multiple key holders.

• Transaction Speed and Cost: Transactions involving multisig wallets combine multiple on-chain signatures, leading to a larger transaction size. This can result in higher gas fees and confirmation delays. Coordination between key holders can also take time.

Multisig Use Cases: When Does it Make Sense to Use Multisig?

Escrow Protection

Escrow transactions between two parties can use 2-of-3 multisig wallets. With the two parties in agreement, the transaction proceeds without a hitch. In case of a dispute, the third party arbitrates and decides on the transaction direction.

Decentralized Finance

Trading, borrowing, and lending can occur through collective decision-making without involving intermediaries. A transaction can occur if there is a consensus among the minimum threshold of key holders.

Collaborative Ownership

In cases where parties collectively own crypto assets, multisig wallets make it easier to build trust among wallet users. Transactions involving shared assets can only occur when all parties agree on using the funds.

The crypto industry is marred with several fraud cases, making wallet security paramount. Multisig wallets provide an excellent option for cryptocurrency holders to maintain control of their assets and keep them secure.