For many years, crypto has been praised for its security. Since no third party controls your funds, and only you can access them, it gives people a feeling of rest. Of course, the opposite is also true, if somebody were to access your wallet, nobody will ever be able to refund your stolen coins or tokens. This is where MultiSig comes into play. In this article, we will explain the basics of what MultiSig is, en how it can help to protect your funds.
Table of Contents
- Public en Private keys
- Digital Signature
- How does a transaction work?
- So what does MultiSig mean?
- Single vs MultiSig wallets
- Decision making
Public en Private keys
If you manage your own crypto coins, you will have a public and private key to your own wallet. The private key may only be known to yourself. The public key, on the other hand, may be seen by anyone. These two keys together are used to sign a transaction on the blockchain. Without both keys, you cannot perform a transaction. The signing of such a transaction is also called a digital signature.
During a transaction, both elements must be combined to reach an agreement. Since only you can create the unique digital signature with your private and public key, you are also the only one who can approve a transaction. So never lose your keys!
How does a transaction work?
To make a transaction, you need a crypto wallet. From the wallet, you can manage your addresses. When you make a transaction from the wallet, the nodes in the blockchain network check if the digital signature is correct. This way, they know for sure that someone is indeed authorized to send certain crypto coins.
You also use the public key to receive a transaction. When sending cryptocurrency, you specify which wallet addresses the coins should be sent to. Only the legitimate owner of this wallet address can receive the transaction with its public and private keys. Without these keys, the transaction remains "locked".
So what does MultiSig mean?
A MultiSig wallet is a digital wallet that operates with multiple addresses. In order to sign a transaction, the authorization of multiple private keys is needed. This way, a single point of failure will be eliminated and the risk of vulnerability will be very small. Most blockchains and wallet providers allow the use of MultiSig wallets.
Single vs MultiSig wallets
In most cases, your crypto coins are stored in a single-key wallet. Meaning that the only private key needed to complete the transaction is the one you own. If hackers manage to get a hold of your private key, the funds can be stolen within minutes. Once you have lost your funds, there is no way to get your funds back. This is because of the decentralized nature of the blockchain.
Most day-to-day users have no need for a MultiSig wallet. But imagine a huge company that stores billions of dollars in a wallet. Now imagine these funds getting stolen because some employee clicked on the wrong link. In this case, it can be very interesting to set up a MultiSig address. Depending on the setup of the MultiSig address, 2, 3 of even 4 keys may be needed in order to complete the transaction.
As we have mentioned before, users are able to prevent problems caused by hackers via the use of their private key. Imagine you have 100k worth of Bitcoin in your wallet, and you would like it to be as safe as possible. Setting up a MultiSig can be beneficial. You could for example store one of the private keys on your phone and one on your computer. Meaning that in order to steal your funds, a hacker will need access to both of those devices. You could see this strategy as a Two-Factor-Authentication (2FA).
In companies that are invested with millions or billions of dollars, a MultiSig can be very important. Imagine 1 of the 6 top leaders in your firm trying to move the assets without anybody’s approval. Or maybe the holder of the private key has a fatal crash, and the funds would be either gone or unmovable. While using MultiSig, this problem is entirely avoided.
Of course, there are disadvantages to a MultiSig wallet. First things first, setting up a MultiSig wallet is not like your typical wallet. It requires some better knowledge of crypto. Secondly, depending on how you set up the MultiSig, funds can still get lost. In some cases, 2 out of 2 signatures are needed. Meaning that if 1 of the 2 loses their private key, the funds are gone. In most cases, you will see 3 out of 4, or 2 out of 3. Meaning that if 1 key gets lost, there is still a possibility to enter the funds.
Despite having a few drawbacks, the MultiSig ecosystem provides a better and more secure environment for crypto traders. If you are in possession of large amounts of assets, we recommend you to use a MultiSig wallet to increase your security. We are curious to see how MultiSig wallets will be integrated in Central exchanges in the future, and will keep you updated if anything changes in the near future.