Multisig wallet is the short term for a multi-signature wallet. It's a cryptocurrency wallet that requires several approvals from different entities to execute the transaction. They are often used as a more secure alternative to the traditional wallet.
A classic single-signature wallet can be controlled by a single person, even when it's a business account. If multiple people give access to a traditional wallet, each co-owner can make a transaction without noticing other co-owners.
It will be almost impossible to figure out who made the fatal transaction. In multisig wallets, each party has a similar access level. It adds more security and transparency both for individual and business purposes.
But how to create a multisig wallet? How to operate them? What are the main benefits and challenges of multisig wallets? In this article, Defiway expert will explain all the details of multisig wallets in 2023.
How Multisig Wallets Work
Those wallets require multiple digital signatures to confirm a transaction. The whole multisig architecture is aimed at maximizing security. The only way to steal funds from a wallet is the inside job where someone steals the personal key of all signers or persuades them to approve the transaction. There are multiple types of multisig crypto wallets. Here are the most popular:
- M-of-N wallets. The most common multisig wallet type, where N represents the number of wallet’s co-owners, and M represents the minimum number of signatures to approve the transaction. If you create a 4-of-6 wallet, you need to collect at least 4 signatures to approve the transaction.
- Hardware multisig wallets. Those wallets store private keys in a specific device that is disconnected from the internet. You can approve the transaction by connecting this device to a computer or other device.
- Software multisig wallets. They store private keys in highly-secured apps. To authorize a transaction, co-owners should open this app on their device and sign a transaction.
- Web-based multisig wallets. Those wallets store keys on the website, so you can access them with any web browser.
We understand that the whole multisig concept may sound complex and confusing. But in reality, working with those wallets is pretty easy:
- Set up the wallet with a predetermined number of signers.
- Initiate the transaction: any signer can initiate a transaction by creating a proposal.
- Review and sign the transaction.
- Transaction execution. It's the official term for approval from wallet signers. Once the transaction is approved, the system records this decision and broadcasts it to the blockchain network.
Benefits of Using a Multisig Wallet
Shared ownership creates enhanced transparency. It's almost impossible to abuse official positions with those wallets. It eliminates the chances of an “inside job” theft because you need several signatures to approve any transaction.
Such an approach reduces the risk of losing funds due to personal error. If one co-owner loses their key, there are still other co-signers to approve the transaction. It makes a wallet more immune to hacking or theft attacks.
Multisig wallets also have better backup and recovery options. Since they need several signatures to approve a transaction, each co-owner can create a backup copy. And if someone accidentally loses access to the wallet, you can use the shared backup to restore it.
Those wallets reduce counterparty risk compared to regular crypto wallets. With traditional wallets, users need to share their private key with third-party (hardware, app, or site). Multisig wallets distribute the responsibility between all co-owners. There is no single party that has complete control over the funds.
Examples of Multisig Wallet Use Cases
You can use multisig crypto wallets in any activity. Our experts divide them into 3 categories: individual, business, and government usage. We highlight the most common usage examples in every category, so you can find out how to use a multisig wallet in your situation.
If you want to try this wallet in your daily life, you can use it as a highly-protected crypto saving account. In the long run, it can even become a family inheritance account. By requiring multiple signatures to authorize any transaction, you can ensure that the inheritance will distribute fairly among all your loved ones.
You can also create a joint account with any family member or close friend. By requiring multiple signatures, you can be sure that all parties will have equal control over the funds. It can be used to buy high-value purchases such as fine art, jewelry, or real estate. Businesses can use multisig crypto wallets for escrow services, joint ventures, or supply chain management. Some firms even can use those wallets to pay their employees. By requiring multiple signatures, they can confirm that salary funds are distributed securely and transparently.
If a company isn’t ready to fully incorporate this technology into its workflow, management can use it for legal agreements, treasury management, smart contract execution, or shareholder voting. Non-profit organizations can use multisig wallets for crowdfunding campaigns and charity fundraising.
How to Set Up a Multisig Wallet
As we said before, in the beginning, multisig technology may look way too complex. But once you understand the principles, it becomes a user-friendly tool. Stick with this easy 5-step instruction to create a multisig wallet:
- Find a suitable multisig provider.
- Generate both public and private keys.
- Provide a public key to each of the co-owners.
- Configure the number of signers and provide the private key for each participant.
- Test the wallet to make sure it's working.
Choose the right multisig setup and select each co-owners carefully. They should understand all rules and responsibilities. Make sure that every member securely stores their keys. Practice their security hygiene. Regularly review and update the wallet’s settings to ensure that it still maintains the needed security level. And don’t forget to have a well-thought-out plan in case of unexpected events.
The most complex step here is to choose a fine multisig provider. Make sure it supports the needed number of signers and your favorite cryptocurrency. Here we’ve gathered the five most popular multisig wallets:
- BitGo — is one of the largest providers. It supports Bitcoin, Ethereum, Dogecoin, Polkadot, and other popular cryptocurrencies.
- Armory — oldest provider in the list. It was developed back in 2011, and since then it has provided various crypto services. You can use cold storage support and sign transactions offline.
- Defiway — a service where you can automate any payout and use your credit card as a payment option. It's the only service where you can store and manage crypto across all blockchains with a built-in exchange. It also has a bridge feature, so you can manage your crypto assets across multiple blockchains and sell assets with lower fees.
- Coinbase — this service also combines wallet, exchange, and neo-bank features. It's a hosted wallet that controls the private keys of users. But you can choose a non-hosted option to manage private keys on your own.
- Copay — simple Bitcoin and Bitcoin Cash wallet from BitPay developers. You can customize security settings and manage multiple multisig wallets from a single account.
Potential Risks and Challenges of Using a Multisig Wallet
Nothing is perfect. And multisig wallets are no exception to this rule. You need at least basic crypto experience to create and maintain this wallet. If a user doesn’t understand blockchain technology it will be difficult for them to run a multisig wallet.
Those wallets can still become a victim of human error. It's crucial to review every transaction and have a backup in case of unintentional mistakes.
If one of the co-owners loses access to their profile, it becomes difficult to use the wallet. It becomes impossible to authorize any transaction with all-in-one wallets when some co-owner loses access to their profile.
Multisig wallets it's quite a new technology, so they lack standardization. And it leads to compatibility issues when you want to transfer funds between different wallets and blockchains. That’s why we recommend you use a service with multi-storage and bridge features, such as Defiway.
Wrapping Up
As you see, multisig wallets are beneficial for private and business users. They are more secure than regular wallets and have more backup and recovery options. Those wallets are more immune to hacker attacks and personal errors.
But they may seem too complex until you figure out their working principles. You can’t immediately buy something or solely decide the further destiny of the funds. You need to wait until other co-owners sign the transaction. If they refuse it, there will be no transaction. When choosing a provider, take a closer look at supported blockchains and the number of co-signers. It will be great if the service has a bridge feature that allows you to manage crypto assets across multiple blockchains.
If you are looking for a user-friendly multisig wallet that fits both business and personal purposes, supports various blockchains, and automatically finds lower-fee exchange options, you come to the right place. Defiway crypto wallet has all those features and even more! We also provide 24/7 support from the best crypto experts: you can chat with us even on your favorite socials
