What is a Multisig Wallet?

A multisig wallet is a cryptocurrency wallet that requires multiple signatures for a transaction to be authorized and approved. The term “multisig wallet” is a shorthand for “multi-signature wallet”.

Those who hold the private keys to a multisig wallet are usually referred to as “key holders” or “copayers”. However, this doesn’t necessarily mean that a multisig wallet needs to involve multiple people, as multisig wallets can also provide a lot of utility in scenarios where a single person controls all the keys.

What is the purpose of a multisig wallet?

Now, let’s quickly explain why a multi-sig wallet is preferred in some situations compared to the more commonly used single-signature wallet design.

Managing crypto held by businesses or DAOs

The most obvious application of multisig wallets is when multiple people have to share control of a cryptocurrency wallet.

For example, it would be extremely risky for a business that owns a large amount of cryptocurrency to have the funds stored in a wallet that’s controlled by only one person. Even if that person was completely trustworthy, the cryptocurrency would become permanently inaccessible if something were to happen to them and there was no way to access the private key. So, businesses will often opt to store their crypto in multisig wallets to reduce risk.

DAOs (decentralized autonomous organizations) also typically store their funds in multisig wallets. In most cases, members of the DAO vote on which members of the organization should be trusted as key holders for the DAO’s treasury.

Individuals can also use a multisig wallet for extra security

While it’s more common to hear about multisig wallets in the context of businesses and organizations that hold crypto, it’s also possible to use a multi-sig wallet as an individual to enhance the security of your crypto holdings. For example, you could set up a 2-of-3 multi-sig wallet for yourself, which would require 2 private keys to approve a transaction. 

In this way, you could split your private key backup in three separate locations, mitigating the risk of losing a backup or having it stolen.

Even if one of the backups was stolen, that wouldn’t be enough to actually steal your crypto since at least one more private key would be required to approve any transaction. If you combine a multi-sig wallet with highly durable metal crypto wallet backups, you can achieve a very high degree of security.

How do multisig wallets work?

Multisig wallets can be used with a variety of cryptocurrencies, although their inner workings can vary significantly between different blockchains. For example, while multisig wallets can be used with both Bitcoin and Ethereum, they are implemented in very different ways under the hood. Let’s quickly explain how multisig wallets work on Bitcoin and Ethereum. 

Bitcoin

In Bitcoin, multisignature transactions are implemented through P2SH (pay to script hash) transactions. P2SH is a type of Bitcoin transaction that allows a set of conditions to be defined through a script. Funds can only be spent if this set of conditions is met. 

You can quickly identify a P2SH address since it starts with the number “3”. If you take a look at a Bitcoin rich list, you’ll see that many addresses that are owned by cryptocurrency exchanges are P2SH addresses.

If you want to create a Bitcoin multisig wallet, there’s quite a few options available to you. Here’s some examples Bitcoin wallets that allow you to set up a multisig:

Ethereum

On Ethereum, multisig wallets can be implemented through contract accounts. These are accounts that exist as a smart contract, and are controlled with code instead of a private key. Contract accounts can execute arbitrary logic, which means they can be used to implement a multi-signature scheme or other utilities. 

Protocols such as Safe (formerly known as Gnosis Safe) use contract accounts to offer users multisig wallets. Safe Wallet also supports advanced functionality such as spending limits, transaction scheduling and batch transactions.

This surface-level explanation should suffice for the purposes of this article. The important thing here is that you understand what multisig wallets are used for and how you can use them to improve the security of your crypto holdings.

Common multisig wallet setups

When people talk about multisignature crypto wallets, they’ll often refer to M-of-N schemes. Here, “M” means the number of keys required to authorize a transaction and “N” refers to the total number of keys involved in the multisig setup. For example, a 2-of-3 multisig wallet has 3 keys in total, with 2 of them being required to approve a transaction.

Here’s some of the most commonly used multisig wallet setups:

1-of-2 multisig setup

A 1-of-2 multisig wallet is a very straightforward setup for shared crypto wallets. In a 1-of-2 multisig, either key holder can authorize transactions by themselves. You can achieve almost the same result by simply sharing a single private key with another person, but a 1-of-2 multisig setup makes it very easy to track which of the wallet’s shared owners made a particular transaction.

2-of-3 multisig setup

2-of-3 multisig setups are quite common. In this setup, there are 3 keys in total, but only 2 are required to authorize transactions. A 2-of-3 setup provides some redundancy and risk management while still being relatively convenient. 

2-of-3 setups are commonly used by crypto exchanges for their hot wallets — typically, one key is held online, one key is held offline, and one key is held at a professional security company.

3-of-5 multisig setup

This is a more resilient multisig scheme, which requires 3 out of 5 signatures for a transaction to be authorized. A 3-of-5 multisig can be utilized by businesses DAOs and other organizations where authorization for multiple people is required before funds can be spent.

The bottom line

Multisig wallets provide increased security when compared to standard crypto wallets which require only one transaction. A multisig wallet can be used to control cryptocurrency owned by multiple parties, or for individuals that want to back up their private keys in a more redundant and safer manner. 

If you’re looking for other ways to enhance the security of your crypto holdings, check out our list of the best hardware crypto wallets available on the market today.