All That You Need to Know About Multisig Wallets

Cryptocurrency has fast gained popularity in the past couple of years. After simmering from its height in 2017, it has experienced a surge in 2019, 2020, and is continuing in 2021, surpassing the previous highs. With the popularity increasing day by day in coins like Bitcoin, Ethereum, and more, the need for an online space to store customers’ assets has arisen.

Just like how we use a physical wallet to store our cash or valuables, cryptocurrency is stored in digital wallets. Digital wallets can either be web-based or hardware-based. This wallet can live on a mobile phone, a computer, a tablet, anything you use to do your online trade.

Every wallet contains a set of private keys and addresses which one can note down and keep safe. However, the biggest issue with this arrangement is that the user can lose the private key or the key can be stolen. After either one of these cases, it’s impossible to gain access to your coins in your wallet.

The infamous example of the QuadrigaCX wallet explains this whole phenomenon in detail. After the death of Gerald Cotten, the sole owner and possessor of the cryptographic keys to the exchange’s wallets, the users had to wait for nearly three years to recoup $115 million worth of deposits.

These issues lent a hand in assisting the birth of Multisig wallets.

What are Multisig Wallets?

Multisignature wallets (multisig for short) are cryptocurrency wallets that have two or more private keys to access the wallet, sign, and send a transaction.

So how it works is simply to imagine the wallet as a bank vault that requires more than one key to open. You can choose how many private keys your wallet can have and the minimum amount of keys required to access it.

For example, you can have a 2-of-3 wallet, meaning your wallet has 3 private keys, out of which 2 are needed. In the same way, you can have 3-of-5, 5-of-7, etc.

Let’s have a quick scenario. Suppose a set of 3 friends, Anya, Bob and Carol set up a cryptocurrency wallet. Each person holds one key, making the number of keys of the wallet be 3. Now to access the wallet, a minimum of 2 out of 3 keys are required. While paying, Anya would create a transaction and sign it with her key. She then would send the transaction to Bob, who will, in turn, sign the transaction from his key. Now Bob can either send the transaction back to Anya to finalize it or send it to Carol to repeat the procedure. The latter option isn’t necessary, as the wallet only requires 2 out of the 3 keys.

The above was an example of a 2-of-3 wallet. Let’s talk about the advantages and disadvantages of multisig wallets.

Advantages:

1. Multisig wallet successfully eliminates the security concern that arises with a single key wallet.
2. It reduces single-person dependency. So what happened with the QuadrigaCX wallet would not have happened if it was multisig.
3. Multisig makes cyberattacks more difficult to carry out because it increases the number of potential failure points a hacker encounters.

Disadvantages:

1. The transaction speed is usually slow. This is because a multisig wallet depends upon either a third party, device, or location to access the wallet and sign the transaction.
2. The recovery process of a multisig wallet is tedious as it requires importing each of the recovery phases on a different device.

Use Cases

Escrow transactions

Escrow transactions can happen by creating a 2-of-3 multisig wallet between two parties, say Anya and Bob, and includes Carol as the mutually trusted arbiter.

Anya will initially deposit the funds into the wallet, thus locking it as funds are not accessible to either Bob or Carol alone. Once Bob has kept his side of the deal by providing the goods or services, then both Anya and Bob can use their keys and the funds will be received by Bob.

In case an issue arises, Carol, the arbiter will be the judge and one to decide. She would get a chance to review the situation and later use her key to create a signature and transfer the funds to either Anya or Bob, depending upon her judgment.

2FA (Two Factor Authentication)

As mentioned earlier, there are multiple types of multisig wallets. Out of which, one type is of a 2-of-2 wallet, meaning the wallet has two keys and requires both keys to access it.

While creating this type of wallet, you can create a two-factor authentication mechanism to access your funds. This way, you can store one key on your laptop and the other one on a piece of paper. Thereby, if there arises a situation where your laptop is compromised by hackers, they would not have the access to your second private key, which you’ve stored on a physical paper.

Examples of Multisig Wallets Implementation

XinFin, in 2018, launched the first of its kind blockchain-based multisig wallet. This wallet lives on the XDC Hybrid Blockchain and can be used for various enterprise use-cases. Xinfin has offered the Multisig feature to increase the security of the wallet.

Armory is a multisig open-sourced desktop bitcoin wallet. Its secure nature allows users to generate and store their Bitcoin private keys in the wallet.

One can also deploy a multisig wallet by using smart contracts in Ethereum.

A step towards securing our assets

The concept of multi-signature/key has already been tried and tested with bank vaults. It works, and we know it. Bringing a traditional method to digital wallets has been the improvement we needed to bring to the world of cryptocurrency to move ahead. This is a technology that is likely to be used more extensively in the coming future.