What is Multsignature (Multisig) Wallet? Benefits and Drawbacks.

The wallet is a door to enter into the crypto world.

A wallet allows you to store and transfer cryptocurrencies by creating a signature using a private key which ensures you’re the owner of the crypto and have the right to transfer it.

But in the growing crypto world where hacking attacks are common, you can lose your signature key means your crypto holdings.

To conquer this problem, many types of wallets are there to add an extra layer of securities to protect your signature key.

Yet, these layers build upon the one signature key, which leads to a single point of failure. It becomes easy for hackers to steal funds by exploiting some phishing techniques or lose it.

But now you can tackle the situation by using Multisig wallet.

What is Multisig Wallet?

The name indicates that to access the crypto wallet, you need more than one signature key.

For example, imagine a secure deposit box which have 2 locks and 2 keys to open the box. One key is in your hand another is in your friend who you trust now only one way you both open the box is providing both keys at the same time, so one cannot open the box without the consent of the other.

How does it Work?

Multisig first introduced in Bitcoin at 2012 BIP16 (Bitcoin improvement protocol). For achieving multisig, Bitcoin uses P2SH script hash and requires M-of-N keys (eg: two of three) to sign a transaction.

As I gave the example above, multisig wallet requires 2 or more users to sign the transaction, and they called as copayers.

But there are different variations in a number of signatures required to sign a transaction it will be lower or equal to the number of copayers of the wallet.

For example, if multisig wallet 4-of-4 which means that shared by four people and requires four signatures to sign a transaction. If it is 2-of-3 then, three people shared the signature and need two people signature to sign a transaction.

The first multisig wallet launched by BitGo back in 2013 since then many bitcoin companies have embraced this new standard, even applied to many different altcoins.

Benefits of Multisig Wallet.

Enhanced Security.

Using a wallet that only requires one private key to sign the transactions leads to more security vulnerabilities like hacking, theft or damage.

While using multisig wallet if one key is gets compromised, the funds are still safe.

For example, you created 2-of-3 multisig wallet and stored each signature keys in different device or place (example, mobile, laptop, tablet) somehow your mobile stolen the thief won’t be able to access your funds using only 1 of the 3 keys.

Escrow Transactions.

Multisig wallets made escrow transactions possible in the crypto world because they let a third party involvement if any dispute occurs between buyer and seller.

For example, a 2-of-3 multisig wallet allows you and your friend A for an escrow transaction by involving a third party Mr B as a mutually trusted arbiter in case anything goes wrong.

In this scenario, you first deposit the fund to get goods or services from friend A which would be locked up (neither of you being able to access them on your own). If A provides goods or services as agreed, then you can both use your keys to sign and complete the transaction.

Mr B, the arbiter, only needed if there was a dispute, at which point B could use his key to create a signature that would provide to either you or A, according to B’s judgment.

Decision Making.

If a big company or corporations uses crypto funds and depend on the single key to protect funds which are in the hand of one board members, this leads to more vulnerabilities.

But instead, they use multisig where each board member gains access to one private key. No individual board member can misuse the funds. However, only the decisions agreed upon by the majority of board members executed.

Doing Lightning Transactions.

Multisig wallets power the lightning transactions, which enables the buyer and seller to do multiple crypto transaction in lightning speed by locking their funds in multisig wallet.

Ok, these are some benifits you can get from using Multisig wallet, but they are not perfect in all scenarios that’s why I listed major drawbacks.

Drawbacks of Multisig Wallet.

Speed of Transactions.

In a single key signature wallet, you don’t need to depend upon any third person, device or location to access the wallet and sign the transaction but in multisig wallet, it requires a third-party involvement which impacts on transactions speed.

Inflexible.

With MultiSig; what happens if one of the parties leaves the group? Or what happens whenever you want to change access policy with a new party joining the group? The access structure in MultiSig solution fundamentally tied to the address.

Conclusion.

If you put security and privacy as no 1 priority, you can go with a multisig wallets besides some tiny drawbacks.

If you have any points to add a mention in comments and if you used any multisig wallet or going to use one mention in comments.

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Originally published at https://ccoingossip.com on March 27, 2020.