Update as of November 2020
Now also, support for Ethereum Multisigs
At the beginning of February, following our clients’ continuous demands, Guarda has become the first-ever lightweight wallet to implement multi-signature technology for our Bitcoin wallet. This article will familiarise you with the term “Multisig”, the context behind it, and its practical use.
What is multisig?
Multisig, short for multi-signature, refers to a security protocol that requires signing transactions with 2 or more keys and serves as a term for wallets that support this functionality. Currently, there are a few currencies that implement this technology, but let’s take Bitcoin as an example.
Usually, the holder of a wallet has a single private key to prove that they are the owner of stored funds and to authorize all outbound transactions. In the case of a multisig wallet, a combination of several keys is required before the transaction may be sent to the blockchain.
When dealing with any kind of financial operations, we want our money to move fast and stay secure at the same time. A single signature is easily manageable and quick, yet the second element is not fully present. As it is the single point of entry, if the key is lost, there is no way to restore it and the money cannot be retrieved. It also suggests that whoever takes possession of the key may manage the funds.
Multisig tackles such security threats by eliminating the single point of failure. Keys for a multisig wallet may be located absolutely anywhere, be it a device, a hardware wallet, a company server or a piece of paper, making it extremely challenging for potential perpetrators to target them.
As the world progresses and cryptocurrencies attract more adopters, people start to look for ways to extend the use of blockchain technologies beyond personal finance. Building a business with the capital stored within a wallet that can be emptied with one signature drives back the demand. The variety of options for multisig setups allows finding more meaningful and diverse ways to implement cryptos.
Behind the multisig
First, multi-signature transactions emerged on the Bitcoin network in 2012 with multisig wallets appearing the following year. Normally, a BTC address starts with 1, but in the case of multisig (and another technology called SegWit), the prefix will always be 3, making it easily recognizable.
Two numbers define a multisig wallet: the number of signatures required for transaction authorization and the total number of keys associated with the wallet. Such a setup is referred to as “M-of-N”, and the main thing to remember about it is that any combination of ‘Ms’ out of ’Ns’ will result in the transaction being approved.
For instance, you wish to have a wallet with 3 keys in total: one stored on your mobile, one on the laptop, and one on a piece of paper with your lawyer. You decide that 2 signatures out of 3 suffice to approve the transfers (2-of-3 setup). This way, if your phone gets lost, you may still access the funds, combining laptop and paper keys. At the same time, if the lawyer decides to cheat you and steal the money, they wouldn’t be able to do it without another signature.
Combinations may vary depending on the needs of the owner or a group of owners: 2-of-3, 2-of-4, 5-of-6, or any other. The total number of keys can also be equal to the required number of signatures (e.g., 2-of-2), yet in this case, there is a risk of losing one of them, which would result in lost access to the wallet.
With the extra layer of security of multisig also comes a couple of details to consider. As the multiple signatures augment the size of a transaction, the fee for such transactions will be slightly higher. Also, as you need to enter several keys, the time to perform the transfer mildly increases for multi-signature transfers.
Ways to profit from multisig technology
Multisig eliminates the single point of entry for a wallet as well as the need for the trust for the holders of the same wallet, which offers a variety of implementations. Here are some ideas on how you may profit from the technology.
- If you are the only holder of a wallet, multisig is a good option to equip it with an extra layer of security. Similar to two-factor authentication, 2 keys stored in different places will need to be provided.
- Within your household, if you share a wallet with your partner, two signatures might be required to approve expenditures. The third key, you may keep securely elsewhere as a backup.
- As an owner of a business, you may wish to divide keys between the main shareholders so that the majority is always in agreement with the flow of funds or other important decisions.
- When performing trustless transactions between parties, the buyer and the seller can choose a mediator and set up a wallet with 3 keys. If the terms are met, the seller gets the money, otherwise, in case of any disagreement, the mediator interferes, and the parties figure out a solution.
Setting up a multisig wallet from scratch without special knowledge is no easy task. The Guarda team has prepared a step-by-step guide on how you can start profiting from this technology today with the Bitcoin wallet.