What is a MultiSig Wallet?
Most people familiar with crypto and who have bought crypto will be already familiar with crypto wallets.
Crypto wallets, unlike the regular wallets you know, do not store the assets you hold instead it stores the pairs of public and private cryptographic keys. A public key allows others to make payments to the address derived from it, whereas a private key enables the spending of cryptocurrency from that address. Crypto assets live in their respective blockchain networks. So we can say the crypto wallet is the technology that acts as your gateway to any blockchain network.
If you are planning to seriously invest in crypto you will need some kind of crypto wallet for sure. There are different types of wallets like software wallets or hardware wallets or even web-based wallet services. But if you just like to buy a few cryptos and hold them in a wallet there are easy ways to do that. You can use the wallet features of crypto exchanges and just need to signup for their service. These wallets are called custodial wallets where your private keys will be held on the service provider's servers. The only benefit here is the ease of use but the cost is you have to trust your service provider with your crypto assets. Coinbase, Robinhood, etc all provide you with such wallet features.
The single-key wallets are most popular with retail users and private keys can be transformed into a 12-word “seed phrase” for better usability. But there is always the risk of a user losing the seed phrase and the wallet becomes unusable and the crypto assets are lost forever.
So there is another kind of wallet called MultiSig wallets.
A MultiSig crypto wallet unlike regular crypto wallets operates with multi-signature addresses and requires more than one private key to sign and authorize a crypto transaction. A MultiSig wallet is a security and usability-enhanced version of a regular crypto wallet.
A MultiSig wallet uses more than one private key to approve and execute crypto transactions.
The private keys can be held in different locations to enhance security while allowing multiple keys to sign a transaction improves usability.
MutliSig still has the same risks associated with losing private keys as regular single-key wallets but tries to eliminate a single point of failure. If only all the cosigners required for the threshold condition lose their private keys the MultiSig becomes inaccessible.
There are two 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.).
MultiSig wallets are the solution for DAOs and crypto communities to handle funds in a decentralized manner.
MultiSig wallets are not custodial wallets as none of the cosigners keep custody of the assets but just the partial ownership required to access the assets.
A popular example of a MultiSig wallet on the Ethereum network is Gnosis Safe
One of the oldest and most trusted Bitcoin wallets Electrum offers the MultiSig feature.
Currently, MultiSig transactions in the Bitcoin network are expensive and have privacy issues. But the recent Taproot upgrade in Bitcoin will help wallet providers to resolve these issues.
More about Taproot upgrade in Bitcoin sometime later,
Have a great weekend!