What Is a Multisig Wallet?

Cryptocurrency communities have long been recognized for their devotion to their preferred currencies and projects. Hot versus cold crypto storage is a long-standing topic in the crypto ecosystem that has been known to produce conflict even across specific communities.

The simplicity and low prices of hot storage make it by far the most appealing to the hot storage camp. Supporters of cold storage, on the other hand, will unite around the old adage “not your keys, not your crypto.” While cold storage wallets provide greater security than standard hot storage wallets, there are times when it is necessary to keep your cryptocurrency online. Furthermore, “not your keys, not your crypto” solutions might become tricky when it is not a single person's crypto that needs to be safely maintained, but the crypto assets of a corporation or group.

In this post, we'll look at multisignature (multisig) wallets as a viable approach of boosting asset security without requiring cold storage, covering how they function and why they've become a popular tool for institutions and decentralized autonomous groups (DAO).

Multisig basics

Multisig wallets, also known as multisig vaults or safes, are a type of cryptocurrency wallet that needs the use of two or more private keys to do certain actions. This is done to strengthen the security of the funds stored in the wallet by requiring several parties to sign off on any transactions before sending them. A multisig wallet works by needing several signatures from a set of preset addresses, and if any of these signatures is missing, the transaction will fail. Consider it a safe with distinct keys that must be used in tandem to open it.

While there are many different types of multisig wallets, the two most common are: the first requires all parties to attest or sign to a transaction, most commonly three-key wallets, and the second requires a certain number of participants out of the total pool to participate for a transaction to process, for example, two of three or three of five.

Because of a key architectural distinction, the process of signing transactions on multisig wallets differs from regular wallets. Externally owned accounts (EOA) are traditional wallets that are produced by users and managed by private keys. EOAs are sometimes referred to as “user accounts,” as they are intended to allow members of the general public to interact with blockchains.

Smart contract-based wallets, on the other hand, are multisig wallets. Instead of being user-managed endpoints, these smart wallets are controlled by code and governed on-chain by their owners. Because of this configuration, multisig wallets are regarded as a “seedless” form of self-custody.

Benefits of using a multisig wallet

Aside from greater security and multi-party participation, there are a number of other advantages to using a multisig wallet. The structure of multisig wallets, in particular for institutions and DAOs, provides a substantially better experience than utilizing regular hot or cold wallets.

No 'key person' risk

First, the basic structure of multisig wallets reduces traditional “key person” danger. When a corporation relies nearly exclusively on a single individual to flourish, this is referred to as key person risk. This vulnerability is all too common in cryptocurrency, especially when only one person has access to a wallet's seed phrase. One of the most well-known examples is the crypto exchange QuadrigaCX. Following the unexpected death of its founder, it was discovered that he was the lone key holder for the exchange's cold storage, which supposedly housed $190 million in inaccessible customer deposits.

Because multisig wallets require several signatures from many participants to complete a transaction, they reduce key person risk and mitigate any single point of failure. Implementations such as two-of-three multisig can further ensure that critical transactions can proceed even if one key participant is not present at the time of the transaction.

Greater transparency

When compared to other forms of wallets, multisig wallets provide more transparency. Transaction policies, signers, and actual transactions are all made public via chain or code. This provides a clear image of the transaction regulations as well as accountability for those who participate in directing funds.

Furthermore, because multisig wallets are open-source, anyone may access the code that rules them. Anyone may audit the wallets and verify that funds remain safe and secure thanks to explicit, open development.

Buildable

Because of its status as a smart wallet, a multisig can be readily altered or improved to meet the needs of an institution or DAO. Developers can build on top of the wallet to create protocols and models that allow for more complex operations such as DAO voting or asset management services. Platforms like Juicebox have enabled groups of individuals to create community-owned, programmable wallets with multisig capabilities.

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