Multi-Signature Wallets: Why they matter, how they work, and which ones should you use.

The blockchain world introduced us to a new era where every type of user needs to have a basic understanding about cryptographic keys. Each account in the network is represented by an address, which is derived from its public key, plus a private key which should be stored securely. Since private keys are not recoverable, if lost, funds are locked and you can’t ask someone for a refund. In addition, if private keys aren’t stored securely and fall into the wrong hands, a single transaction can take over all your funds.

Hardware wallets can provide a solution to these issues, but only when funds belong to a single person. Therefore, the need for secured wallets that store funds which require multiple parties to perform transactions is crucial.

Introducing Multi-Signature Wallets (MultiSig) - a lock that only opens with enough keys, out of a set of predefined keys. Let’s say that Dan, Jane and Bill want to open a business together and invest some of their money. But none of them want one single person to have access to the private keys to the funds. So they each get one key and use a MultiSig wallet that requires two out of three signatures of those keys. This way none of them can run away with the money alone, but also don’t require all three signatures to pay an expense.

MultiSig wallets share some basic functionalities:

• Can hold native cryptocurrency (and possibly other tokens on the network).
• Keeps a list of the accounts considered owners the wallet.
• Define rules on how many accounts must approve a transaction before it is submitted.
• Provides a way to submit a request.
• Provides a way to accept a request (and submit it in case you’re last).

There are many use cases for MultiSig wallets:

1. Shared Wallet — One key alone is required to access funds and spend anything. This is the least secure MultiSig option. It could be relevant for small group funds which don’t require a high level of security — since any individual can jeopardizes the whole group.
2. Partner Wallet — N out of N signatures are needed in order to send a transaction. From a security standpoint, this option is better than the first, since everyone involved needs to approve a transaction. However, it also presents a huge risk. If any key is lost, all funds are irretrievable. This use case could be thought of as multi-factor authentication — for example when one key is on your phone and the other on your laptop
3. Trustless Escrow — 2 out of 3 signatures are needed in order to send a transaction. For example, a buyer, a seller, and a trusted dispute resolution third party could have all access to the same MultiSig wallet. In this case, no single party in the transaction could have full control over the funds. Funds can only be released from the escrow when two parties act together in agreement. When a transaction goes smoothly, buyer and seller can sign off- without the need for a the third party mediator. If and when there is a dispute between buyer and seller, the trusted mediator would be able to resolve it. The “third key” can be then used to grant either party access to the funds, based on the conditions of the transaction.
4. Managing Organizational Funds — M out of N signatures are needed in order to send a transaction. For example in a board made up of of nine directors, where five of them are required to agree on a transaction in order for those funds to be released and spent.

These are the principle of MultiSig wallets and their basic functionality. However, it is worth taking a brief look at how these are being implemented and used across some of the leading blockchain networks:

Gnosis MultiSig - Ethereum

When Ethereum was released there was no built-in support for MultiSig wallets. Therefore, its own community developed implementations for these needs. All implementations of MultiSig wallets are actually smart contracts on the Ethereum network.

There are various implementations of MultiSig wallets by Parity Technologies and the Ethereum Foundation, but the one we recommend the most is the Gnosis MultiSig (upgraded implementation of the one by Consensys). To date, Gnosis MultiSig wallet seems to be the most secure in comparison to Parity’s wallet, which suffered two major security incidents. In addition, it has broader functionality than the Ethereum Foundation’s wallet.

Key Gnosis MultiSig features include:

• Ability to hold Ether and any kind of tokens with MultiSig support
• Easy to use offline signing (cold wallet) support
• Integration with web3 wallets (Metamask, Mist, Parity, etc)
• Transaction data and log decoding, making transactions more readable
• Interaction with any contracts with UI support
• Hardware wallet support (Ledger Wallet)
• Optional email notifications when an event is triggered or you are required to sign a transaction

Electrum - Bitcoin

Electrum is one of Bitcoin’s most popular wallets. It walks the fine line between usability for beginners and functionality for experts. Since the Bitcoin network has built-in support of creating MultiSig wallets, there are many features to choose from. The configurable ‘M out of N required signatures’ in this wallet plus its ease of use makes it our most recommended MultiSig wallet.

Key Electrum features include:

• Encrypted wallet: the file that contains bitcoin private keys is protected with a password, and never leaves the user's computer
• Transactions are signed locally: Your private keys are not shared with the server. You do not have to trust the server with your money.
• Cold storage: Keeping private keys offline is supported. Has a watch-only mode for online use.
• Multisignature: Dividing the power to spend coins between multiple wallets is supported.
• Hardware wallet integration: Many leading hardware wallets can interface with Electrum.

What’s your experience using MultiSig wallets? Have personally you tried Electrum or Gnosis MultiSig? I’d love to hear your opinions on which MultiSig wallets work best for you and discover new ways or use cases in which other people are companies are leveraging them. Leave a comment or get in touch!

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Hexa Labs is a dedicated blockchain solutions consultancy. Our multidisciplinary team helps established enterprises and global brands explore new business applications of blockchain. Together, we manifest the highest potential of blockchain-enabled disruption in the world economy.

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