Basics of Multisig Wallet That Every Crypto User Should Know

Security has always been a major concern for all crypto users. There are many safety measures that digital asset users employ to safeguard their assets. A multi-sig wallet has emerged as one of the most notable ways to do that. Essentially, it is a wallet signed by multiple partners on the protocol. 

These wallets have become prominent for users managing their funds as a group. They certainly enhance security with a rather complex mechanism that’s hard to penetrate for the cyber miscreants. So let’s get into the concept of multi-sig and find out what it does.

Exploring Multisig Wallets

A multi-sig wallet works when multiple members hold private keys and approve each transaction. So all the token holders approve transactions only when every private key holder gives a nod. All the decisions regarding the token transfer are executed using smart contracts. The wallet functions like multi-factor authentication. 

It comes in very handy when multiple parties manage the assets in a typical DAO environment. Although multiple parties are involved, not all of them have to approve transactions. Only two or more key holders can finalize and greenlight them. Using smart contracts, the blockchain members access rules and call the shots.

Following the smart contracts, these wallets are seedless self-custody applications. They let the owners govern over an on-chain structure. Moreover, they are an upgrade to all centralized wallets that could be more focused on safety. 

Merits of Multi-Sig Wallet 

Apart from enhancing security, multi-sig wallets deliver many other advantages to users. Especially for DAOs and DeFi-based operations, multi-sig wallets emerge as the best option. They deliver a great experience to users who want to experience decentralization to its fullest.

No Arbitrary Transaction

By distributing the approval, the wallet rules out the possibility of one person making all the decisions. While it’s ideal for an individual wallet, it becomes problematic when multiple people are involved. For instance, assets worth $190 million became inaccessible when the wallet’s sole owner died. 

In a multi-sig wallet, not only do the wallet holders validate the transactions, but they can also eliminate someone. They can also mitigate any single point of failure. Furthermore, they can change the ownership equation. From three people, it could be two people authorized to make decisions or vice versa. 

Higher Transparency

Involving multiple parties for every transaction, multi-sig wallets always ensure high transparency. In addition, they come with clearer transaction policies and conduct every activity above board. These wallets keep all the information publicly viewable on the chain or in the code. 

Every person in the blockchain knows about the people accountable for transactions. On top of that, everyone can audit the wallet and ensure the security of funds. 

Scalable Structure

The structure of a multi-sig wallet is always scalable per se. This means that they can be easily upgraded or modified as per the needs of the DAO. Developers can create protocols and models for executing more complex application actions. They can even make big changes in the asset management services or voting system.

For example, Juicebox has authorized the community to program the wallet as per their needs.

Demerits of Multisig Wallet

Users must also know the drawbacks of multi-sig wallets.

Technical Knowhow– Setting up a multi-sig wallet and even choosing it could be difficult for new users.  It takes a certain level of knowledge to understand how these wallets work.

Conflict Possibilities– One can’t expect all the members to agree on the same thing. In this wallet, this issue might occur depending on the mutual understanding of holders.

Speed & Cost– Transactions with multiple on-chain signatures become larger. This leads to higher gas fees and confirmation delays due to various reasons.

Multiwallet Authorization Protocols

One may also call them types of multi-sig wallets. They determine how the transactions are executed. 

1 to 2 Signatures

Under this arrangement, one out of two signatories can make the transaction. As the numbers indicate, it’s suited for small wallets with a few holders. 

2 to 3 Signatures

This one authorizes two out of three people to make transactions. The holders keep one private key offline and another one online. The third one usually goes to a security company. 

3 to 5 Signatures

Out of five key holders, three can make decisions here. Four keys are kept in offline locations while the fifth one remains with the security company. Only two of the four offline keys are needed to execute the transaction.

Conclusion

Multi-sig wallets bring a higher level of security and greater reliability to the DeFi network. However, crypto users must know that they don’t provide foolproof protection from cyber miscreants. Thus, they must weigh all the options and then choose one based on their requirements. Ultimately, they should be ready to adapt to more advanced solutions to keep their assets safer.

Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.