Multisignature Wallet: the Basics
Although smart contracts have been widely applied in various fields for quite a while, their concept still remains somewhat of a mindbender for the average user. This series of articles aims to shed some light on the purpose and working principles of the selected smart contracts supported by Smartz platform thus providing you with a simple explanation in relation to each of them. Today’s article is dedicated to the multisignature wallet also referred to as multisig.
The main feature that allows to distinguish multisig from other types of wallets is the minimal number of signatures required to authorize a transaction: as opposed to conventional wallets which require a signature from only one certain person — the owner of the key — to confirm a transfer, multisig requires signatures from more than one party. The owner of a multisignature wallet decides how many signatures there should be in total for a transaction to be confirmed. The most common case here is a 2-of-3 type of wallet: there are 3 signatures in total, two of which are necessary for the transfer to happen. No matter how many people are required to cooperate, the basic principle is the same: a transaction must be signed with N signatures out of M, the latter being greater or equal to N.
Needless to say that the obvious advantage of multisig over the other types of wallets is the enhanced security it allows for: if any of the participants/owners are hacked or lose their devices (e.g. a phone or a laptop), the funds stored in a wallet can’t be withdrawn by virtue of the wallet’s design. The application of a multisignature wallet instead of a conventional one also solves problems of trust and control over the funds particularly common in multilateral (think family or corporate) relationships.
The full potential of multisig can be perhaps best explained through the scenarios where it is really helpful and can’t be replaced by a conventional wallet — although such scenarios are almost limitless, let us take a look at some of the most common ones, arranged in accordance with a certain type of wallet:
a) 2-of-2: a family savings account. Suppose Emma and Walter have been married long enough to have learned not to trust each other when it comes to rash purchases. In this case both Emma’s and Walter’s signatures are required for a purchase to be made — from now on neither spouse will be able to spend the money stored in the wallet without approval from the other.
b) 2-of-2: a double authentication wallet for one person. Let’s say Joe is one of those daydreamers who tend to leave their phones in coffeeshops as well as other public places every once in a while. In this case he can store the first key on one device and the second key on the other — an attacker won’t be able to withdraw the funds stored on the wallet unless Joe was unlucky enough to have lost both devices.
c) 2-of-3: a parents’ savings account for a child. Think of a family fund that consists of the husband and wife and a third-party trustee — let it be the grandmother — all of them owning a key. The kid can only spend the money with the approval of two adults (or would require approval from all three in case of a 3-of-3 wallet). Again, if someone is hacked, the funds will remain intact and can be withdrawn to another, secure address.
d) 2-of-3: a sale with trustless escrow. Suppose Lisa wants to buy something from Michael, but she doesn’t trust him (and vice-versa). They can then agree on mediation from a third party — an arbitrator who will help to solve a dispute if one arises. All three parties get their own key; Lisa commits money into the wallet. If the transaction goes smoothly, then both Lisa and Michael can sign the transaction to release the money to Michael. If a dispute arises, it can be solved by the arbitrator, who can either help Lisa get her money back or help Michael release the funds depending on who was acting in bad faith.
e) 3-of-3: business transactions requiring the approval of several company employees. Think of transactions that require the approval of certain staff members: CEO, chief accountant and security officer all together. The transaction won’t pass until it’s signed by each of them.
f) 8-of-12: corporate board of directors approving a transaction. Say a corporation has a board of directors, and the articles of incorporation provide that certain transactions require consent of a qualified majority — let it be eight votes out of twelve. In that case, once at least eight signatures are signed, the transaction will be carried out.
As one can probably see, multisig can be applied to numerous types of situations, which makes it such a useful tool for trustless transactions which require enhanced security. The deployment of a multisignature wallet on Smartz platform is actually not as complicated as it might seem at first glance: given that there is a simple step-by-step guide on how to deploy relatively similar smart contracts, it’s smooth sailing even for a non-tech savvy person. The only time you’ll depart from that guide is when filling the fields specific for a multisignature wallet such as the number of owners and their addresses, the quorum of signatures required to withdraw funds — all of these are described here, as well as the functions you can exercise once the wallet has been deployed. The whole process can be best described as intuitive, since both mentioned guides are self-explanatory.
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