Key Insights
- Security is highly important in the crypto space, where hacks and scams are rampant.
- One of the best ways to achieve security in terms of storing funds is through multisig wallets.
- These wallets make it significantly harder for hackers to make away with funds, considering how they require multiple signatures.
- Some popular configurations for multi-sig wallets include 2-of-2, 2-of-3 and 3-of-5.
- Possible downsides to using multi-sig wallets include complex setups, challenges with key management and slower transactions.
Security is everything in crypto. This is especially true in the world today, where the number of hacks and scams is on the rise.
For this reason, protecting ones digital assets against theft has become a top priority.
One major solution that offers users more security in such a dangerous financial space is a multisig (or a multi-signature) crypto wallet.
So what kind of wallet is this, and how does it work?
Understanding Multisig Wallets
A multisig wallet is like many other kinds of crypto wallets, only that it has a few key differences.
Instead of transferring funds under authorization from a sole owner, multisig wallets require multiple private keys to authorize transactions.
This means that instead of a single person being In control of the funds said wallet contains, multiple parties must approve before any funds can be moved.
This setup adds an extra layer of security to the mix, and prevents unauthorized access.
Think of it like treasure chest with multiple keyholes.
If two or more people need to access it at the same time, no single person can access the funds behind the other’s back.
This is especially important in the crypto space, where thefts are rampant.
Even if the private keys of one signer are compromised, the funds remain safe.
How Do Multisig Wallets Work?
Multisig wallets need to be set up on creation, with some of the common configurations including:
2 of-2
This setup requires two signatures to authorize a transaction. In essence, if one key is lost, the funds may become inaccessible.
2-of-3
This setup requires two out of three signatures, and is common for joint accounts and business transactions. As long as the majority of three signers are on-board, funds can be moved—even if one key is lost.
3 of-5
This configuration is similar to the 2-of-3 kind, but requires five participants instead of three.
Funds can be moved as long as three of five participants are on-board, which, again is a “majority carries the vote” situation.
Each participant holds a unique private key, and when a transaction is initiated, three out of the five must be present—otherwise, the transaction won’t go through.
This setup is more common in larger organizations, where added security and decision making control are important.
Benefits of Multisig Wallets
Multi-Sig wallets are important for many reasons, and here are a few examples:
Better Security
Single-key wallets can be highly risky.
If someone gains access to a single private key, they control all the funds. Multi-Sig wallets are a direct solution to this problem, considering how they require multiple approvals.
In essence, there is more decision making control, and hackers find it much harder to steal funds.
Protection Against Fraud
Since transactions need multiple authorizations, a single insider (or hacker) cannot move funds without approval from other holders.
This setup is great for businesses and organizations where multiple people manage a single stash of assets.
Backup and Recovery Options
Losing a single wallet’s private key can be a real disaster. However, multi-sig wallets directly counter this problem, with 2-of-3 or 3-of-5 setups, where funds can still be accessed if one key is lost.
Better Financial Management
Multisig wallets are incredibly useful for ventures like businesses, joint investments, defi platforms and so on.
They make sure that no single person can make financial decisions without authorization, and are therefore great for accountability.
Use Cases for Multisig Wallets
This kind of crypto wallet is useful for many applications including:
Business and Corporate Accounts
Companies dealing with crypto need to be strict about their finances. For this reason, multisig wallets are highly suitable because they ensure that funds are not controlled by a single individual.
This reduces the risks of mistakes and embezzlement.
DeFi Projects
Many DeFi platforms use multisig wallets to secure user funds. This approach makes sure that many decisions like contract upgrades or fund distributions cannot be made by a single person.
Joint Crypto Investments
A group of crypto investors can always use multisig wallets to manage funds at the same time. This setup makes sure that withdrawals and other transactions need group consensus for approval.
In essence, no single investor can make unilateral decisions.
Escrow Services
Transactions involving large sums can also have a third party to act as an escrow, via a multisig wallet.
For instance, a 2-of-3 wallet setup can include a buyer, seller and escrow agent and transactions can only go through when two of the three parties agree.
Putting it All Together
Multisig wallets have numerous advantages. However, they also have a few disadvantages, including complex setups, challenges with key management and slower transactions to mention a few.
They require much more technical knowledge to set up, unlike single-key wallets which are straightforward.
This wallet setup can also be a disaster if too many members lose their keys in a strict setup (like 2-of-2).
Overall, their benefits outweigh their downsides, and some popular multi-sig wallets to choose from include Electrum, Gnosis Safe and Casa.
