Multi-signature wallet: what is it and how does it work?

With the increasing popularity of cryptocurrencies and digital assets, there is an increasing need to store these funds securely and take effective measures to protect them. One of the effective methods for ensuring the security of cryptocurrencies is the use of multi-signature wallets, which provide an additional level of protection. This approach reduces the likelihood of a single vulnerable point in the system through the use of multiple keys. As we know, most often it is the person who is the weak point of any security circuit.

The first multi-sig wallet for Bitcoin was developed by BitGo in August 2013 and became a popular security tool after the collapse of the Mt.Gox exchange in 2014. Nowadays, many blockchains, cryptocurrency exchanges and other services support the use of multi-sig addresses to ensure the security of their transactions, maintain customer trust and protect funds.

Now there are many providers of multisig wallets, such as Argent, Safe, Trezor, Coinbase and others.

When setting up a multisig wallet, it is important to first generate a unique multisig address. This address is tied to a specific wallet and is used to receive funds. To make a transaction from such a wallet, a certain number of signatories must sign the transaction. For example, in a two-of-three scheme, the signature of at least two of the three private keys is required to authorize a transaction.

To transfer funds from a multisig wallet, all participants must jointly sign the transaction using their individual keys. Once the required number of signatures are received, the transaction is considered authorized and can be sent to the blockchain for processing.

Such wallets reduce the risks associated with compromising a single key. Even if one of the keys becomes available to an attacker, he will still need access to additional keys to complete the transaction.

Multisig crypto wallets differ in the number of active private keys and the required number of signatures to complete a transaction.

Popular types of multisig wallets include:

M-of-N
A few of the total. This type of multi-signature wallet requires a total of "N" private keys for authorization. To conduct, confirm and process a transaction, a subset of keys "M" from the total number "N" is required. Typical settings include two out of three, three out of five, and so on, indicating the number of signatures required out of the total number of available keys.

N-of-N
Everyone must sign. This type of multi-pig crypto wallet requires all parties involved to confirm the transaction in order for it to be completed and processed. For example, in a two-out-of-two or three-out-of-three case, all parties must sign their private keys for the transaction to be valid.

In addition to these common types, a smart contract can be used to create a sequential multi-signature crypto wallet, where the signing order of the private keys is predetermined. Each private key must sign the transaction in a specific order for it to be processed. On the other hand, time-locked multisig wallets can only authorize transactions after a predefined time delay, adding an additional layer of time-based security.

The decision to use a multisig wallet requires careful consideration of its advantages and disadvantages.

Multi-signature cryptocurrency wallets have both advantages and disadvantages.

Additionally, such wallets distribute trust across multiple parties, making them an excellent choice for collaboration scenarios such as managing company assets, decentralized autonomous organization (DAO) funds, or joint family accounts. A multi-signature wallet effectively prevents abuse of power, gives parties a sense of responsibility and ensures that no transaction can be carried out without the necessary consent of all participants.

Cryptocurrency exchanges and crypto wallet solution providers also widely use multi-signature wallets to provide an additional level of protection for user funds.

In a multi-signature wallet, authorization of a transaction depends on the interaction of multiple key holders. If one party does not respond or is unwilling to sign, this may hinder the transaction process. Additionally, not all cryptocurrencies or blockchain platforms support multi-signature functionality, requiring users to check compatibility before implementing it.

Enterprises and decentralized applications often use shared wallets for treasury management, with the goal of distributing financial control among key decision makers. This reduces the risk of misappropriation of funds and ensures more transparent and secure financial management.

Blockchain escrow services benefit greatly from the use of multi-signature wallets in terms of security. In transactions where a third party holds funds until certain conditions are met, a multisig wallet ensures that each party is involved in approving the release of funds. This increases transparency and provides additional security measures since all participants must approve the transaction before it can be completed.

Members of decentralized autonomous organizations (DAOs) strive to ensure transparency and fairness in their systems of proposals, voting, governance and distribution of funds. One way to achieve this goal is to use a shared multi-signature wallet. This method helps prevent fraud and other unscrupulous activities by ensuring that DAO funds are protected from unauthorized access through multiple keys.

We at AML Crypto want to remind you that you can perform an AML verification of a crypto address in our solution Btrace. By the way, this also applies to multisig addresses. The first AML check is free for every new user.

And if you do become a victim of crypto fraud or scam, then read this article and contact our specialists for blockchain investigation and return of stolen funds.