Cyber safety is one of the main pain points in the modern finance world. As tech becomes common, more people start to use digital assets. It pushes hackers to create new ways to steal their money.
Traditional finance systems partially solve this problem for businesses by creating joint accounts. They don’t have a single owner. To run a transaction, they need approval from multiple co-signers. And in traditional bank systems, it may take days or even weeks for a single transaction to get approved.
Modern businesses don’t have time for it. So, they start looking for more time-efficient ways to run a joint account. And here comes blockchain! Multisignature protocols unlock new finance and social opportunities, allowing people to run instant joint transactions.
But how is that possible? In this article, I want to discuss the role of multi-signature protocol, how it helps businesses while providing additional safety, and how you can implement it into your workflow.
The Basics of Digital Wallets
A digital wallet is a service that enables you to store, send and receive crypto. Some companies provide you with a wallet in a mobile application, and some provide it as a web application, while some have both.
Every digital wallet stores your public keys to fasten the transactions. Some wallets have constant access even to private keys. They encrypt your data, so no one can steal money from your wallet. Technically.
However, if someone hacks a wallet and gets private keys, they can send money from your account wherever they want to. Thus, is crucial to pick the safest possible option.
There are three main crypto wallet types: hot, cold, and non-custodial. Hot wallets are constantly connected to the internet, so you can access them from any device. But, it makes them vulnerable to hacking attacks. Once criminals hack the wallet provider, they get access to many wallets on this service.
Cold wallets are not connected to the internet. It makes them more secure. But they are also less convenient as you need to connect those wallets to a computer or a powerful tablet. And only after it, you’ll get access to your own money. If you don’t have a computer near you, there is no way to access the funds. If you physically lost this drive, you will lose access to all your funds.
There are also mixed (non-custodial) wallets. Users can access them on any device, but the service doesn’t store private keys on their service. It’s the responsibility of the user.
Non-custodial wallets can be described as a mix of hot and cold wallets. In hot wallets, a provider has access to the user’s private keys and funds, in cold and non-custodial wallets they don’t have constant access to the user’s keys and money.
Consider the security and convenience of the wallet. It should be compatible with your lifestyle and have strong protection against hackers. Ensure that the wallet provider runs the currencies you want to store. Check if they have customer support that works 24/7.
Understanding Multi-Signature Protocols
Multi-signature is a crypto technique allowing multiple parties to jointly control a single digital asset (wallet). Each wallet owner has a private key. And to launch a transaction, you need to collect the pre-described number of signatures.
Some wallets ask for 51+% of the owner's approval (6 out of 10 signatures), and some need an 80% approval rate. Otherwise, the system won’t launch a transaction.
Let’s set more real-life examples: a 2-of-3 multi-signature setup. It requires the signatures of 2 out of 3 parties. If 2 of the 3 parties agree to a transaction, it immediately authorizes. But if only 1 party agrees, there will be no transaction.
So, how does multi-signature differ from single-key security systems? In a single-key security system, there is only one control party. If a user provides a login and password of their wallet to the hackers, they lost their funds.
A multisig wallet works slightly differently. Even when one of the signers loses access to the account, there are still other users to block this smart contract. To launch the transaction, the hacker needs to compromise multiple co-signers' private keys.
Multi-signature setups can be used in crypto wallets, smart contracts, and file sharing. They can be used in voting systems since the only way to execute a contract in this setup is to ensure that multiple parties agree with a contract.
Why Multi-Signature Protocols Are Crucial
The digital finance space is vulnerable to cyberattacks. In 2021, there were over $10 billion in cryptocurrency thefts. Unfortunately, the number of cyberattacks on financial institutions is only expected to grow.
More and more people store their assets digitally while having not much cybersecurity knowledge. So, we see constantly rising hacking threats.
Just in the last few years, there was multiple loud cases of digital wallet breaches. The 2018 Coincheck hack resulted in the theft of over $530 million in crypto. Speaking about more recent examples, I can’t pass over the Binance hack in May 2021. It was hacked for $40 million in cryptocurrency by criminals who exploited critical vulnerabilities in Binance's hot wallet system.
In March 2022, Axie Infinity, a popular blockchain game, was hacked for $625 million in cryptocurrency. In June 2022, Harmony, a decentralized finance protocol, was hacked for $100 million in crypto. Cybercriminals exploited a vulnerability in Axie’s and Harmony's bridges.
Multi-signature protocols can be customized to meet specific customer needs, such as the number of required signatures and the distribution of private keys. These protocols can be more auditable than single-key security systems, as all transactions are authorized by the complex setup and recorded on the blockchain.
One of the most infamous crypto hacks was the DAO hack in 2016, where criminals stole over $50 million in crypto. The hack was possible because the DAO used a single-key security system, where attackers only needed to compromise one private key to steal the funds.
If the DAO had used a multi-signature security system, criminals may not hack the system. It would take years (or even decades) to crack at least a few other signatures to authorize the transaction, so the potential hack becomes unprofitable.
In 2019, Ledger, a hardware wallet manufacturer, was hacked for over 1 million user records. The breach includes private keys for wallets. This hack resulted in the theft of over $10 million in crypto.
However, there were cases when multisig protocol already safe people and their money. Back in 2017, the Canadian Imperial Bank of Commerce was the target of a cyberattack targeting its online banking system. It was unsuccessful because CIBC uses a multi-signature security system for its online banking transactions.
The attacker would have needed to compromise the private keys of multiple CIBC employees to authorize the transactions. So after a few unsuccessful attempts, hackers abandoned that task.
The Theta Foundation currently uses a multi-signature security system to protect its funds. This system requires the signatures of three out of five members to authorize a transaction. It helps to protect the foundation's funds from hacking attempts. The EOS foundation uses a two-of-three signature system to protect the foundation's funds from hacking attempts.
Implementing Multi-Signature in Digital Wallets
Before creating a multi-signature wallet, predetermine the number of signers to authorize a transaction. A higher number of co-signers provide more security while making it more difficult to authorize transactions. The most popular options are 2-of-3, 4-of-5, and 6-of-8.
After, think about proper key management. It’s important to keep safe from unauthorized access. Here is how you can set up your joint account:
- Pick the provider. Choose the one which has needed cryptocurrencies and good reviews.
- Create a wallet with other participants. In some wallets you need to be all online simultaneously, users can visit the service to get a private key whenever they want.
- Ask each member to store their keys securely. If the critical amount of users (2-of-3, 3-of-5, or another set amount of people) lost access to their keys, everyone will lose transaction access even when others can see and log into their wallets.
- Authorize each transaction with a predetermined number of signatures.
Predictions and Future Implications
I think that this technology will become more and more common. People are looking for safe yet inclusive digital solutions, and multisig systems fit them well. As of today, those wallets are used mostly for business, but we will see their implications in civilian life.
Some people may create a sharing account with friends to fund their travels. Some families get multisig accounts to save money on big purchases like cars, homes, etc.
Multisig wallets will become more flexible, allowing users to customize the number of required signatures and the distribution of private keys. They also will become more secure.
It may become a new standard in the next 7-10 years. Multi-signature wallets have many advantages over single-key wallets, such as increased security and distributed control. As the demand for more secure digital wallets grows, multisig wallets will become the norm.
But, we still need to address potential challenges and threats that come with the new wallet type. Multi-signature wallets are more complex to set up. While tech-savvy users adore it, beginners may even quit crypto since it becomes too complex for them.
Multisig wallets are still vulnerable to security vulnerabilities, such as phishing attacks and malware. Users need to be aware of these risks and don’t click on suspicious links or provide personal info to others.
How Defiway Incorporates Multi-Signature Protocols
We, at Defiway offer you a non-custodial wallet for individual and joint accounts. As I previously said, non-custodial storage combines the benefits of hot and cold wallets: they can be accessible from any device.
We don’t store your private keys. It’s up to you where you store them: in some files, password manager, or even in Apple Notes.
You can set up private and joint accounts and use them wherever you want. Our multisig account provides high-security storage for multiple users, multi-chain and web3 support, a built-in dApps browser, and 24/7 customer support.
We also provide you with industry-leading security to keep each bit of your crypto data safe.
Multi-signature protocols are essential for the modern finance world, including the crypto sector. They provide additional security for joint business accounts, distributing responsibilities between multiple users. They can be used in finance, insurance, and even voting systems.
Multisig wallets are far more difficult to hack since they are required to get multiple signatures in a smart contract to launch the transaction. This approach already saved multiple crypto projects from possible hacks. And it will save even more business in the future.
However, you should trust co-signers. If more than a pre-described amount of users lose their private keys, everyone will lose access to the account. Thus, we recommend you stick with basic cybersecurity rules such as using 2-factor authentication and keeping software up-to-date.
Want to try multi-signature protocols to understand if would it fit your needs? Download Defiway Wallet and create a joint wallet to use in your business or create a family savings account in crypto. Subscribe to our socials, so you won’t miss our new useful research!