In the crypto and blockchain world, investors need cryptocurrency wallets to store, access, and send and receive their cryptocurrencies. Cryptocurrency wallets come in different types and features. Cryptocurrency wallet developers try to develop cryptocurrency wallets that best suit the needs of investors. These cryptocurrency wallets include private keys and public keys. Investors and cryptocurrency owners can store their cryptocurrencies securely with private keys. At the same time, users can access these assets. They also allow investors to buy, send, and spend cryptocurrencies like Bitcoin and Ethereum.
Hardware wallets that store cryptocurrencies on hardware, such as Ledger, are similar to USB sticks. There are many more types of wallets, from Coinbase Wallet-like mobile apps to wallets that popularize the use of cryptocurrencies for online shopping.
Cryptocurrency wallets work differently from ordinary wallets that store fiat currencies. Essentially, instead of storing users' cryptocurrencies, these cryptocurrency wallets make them accessible on the blockchain network. They do this with a technology called a private key. With private keys, the cryptocurrency investor's ownership of that asset is verified and access to the transaction is granted. Private keys are important for wallets. Because in almost every type of cryptocurrency wallet, if private keys are lost, investors may lose access to their cryptocurrencies.
What Is Multisig Wallet?
Multisig is a special type of digital signature that makes it possible for multiple users to sign documents as a group. A multisig is created as a combination of several unique signatures. Multisig technology is also used in blockchain. However, the use of the technology dates back to long before the creation of Bitcoin.
In the context of cryptocurrencies, Multisig technology was first applied to Bitcoin addresses in 2012. Later, this development was the first step in the creation of multisig wallets. About a year later, multisig wallets were implemented. Multisig addresses can be used in different contexts. However, multisig wallets are mostly preferred for security concerns.
How Do Multisig Wallets Work?
To make a clear analogy, one can think of a locked safe with two locks and two keys. One key is held by person X and the other key is held by person Y. If one wants to open the safe, there is only one way. This way is to use both keys and to open the safe with the permission of both X and Y. Otherwise, if only X or Y tries to open the safe, the safe will not open. By using multisignatures, cryptocurrencies held at addresses can be accessed if at least two or more signatures are obtained. A multisig wallet allows the owner to provide an extra security measure to protect their assets.
What Are Single-Key and Multi-Keys?
In general, Bitcoin uses standard and single-key addresses. Whoever holds the key corresponding to the addresses can access the cryptocurrencies. It means that only a single-key is needed to execute trades, and anyone else who holds the private key can access and trade cryptocurrencies without the need for a warrant.
Single-key addresses are relatively easier to manage than multi-keys addresses. However, multi-keys addresses are still more secure than single-key addresses. Addresses that prefer a single-key may experience more security issues. Cyber attackers are more likely to target these single-key addresses. These attackers try to hijack the accounts of cryptocurrency owners using different phishing methods. Single-key addresses are also not a safe choice for businesses using cryptocurrencies. In cases where the capital and savings of a large firm or company are stored in a wallet using a single-key, the private keys should be entrusted to one person.
Multisig wallets can prevent problems in these situations thanks to the additional security they provide. Unlike single-key, multi-keys store cryptocurrencies in multisig addresses. Thus, cryptocurrencies can only be accessed by at least two people.
In multisig address configuration, there may be differences. A combination of many different keys may be required. The most preferred type is the wallet type, where there is one address with three signatures and the signature of two is sufficient. However, depending on the configuration, wallet types such as 2 of 2, 3 of 3, or 3 of 4 are also used.
Multisignature technology has different uses and purposes. Some of these are as follows:
- Enhancing security
- Two-factor authentication
- Escrow operations
- Decision making
Enhancing Security
Through any multisig wallet, cryptocurrency owners can minimize the problems associated with the loss or theft of private keys. Depending on the configuration of the multisig wallet, even if a private key is lost, the account can remain safely accessible to its owner. For instance, suppose that person X creates a multisig wallet that is 2 out of 3, and each private key is stored in separate locations. One of the keys is compromised by malicious actors. The malicious attacker tries to gain access to the wallet using the compromised private key. But no matter how hard the attacker tries, he will not succeed. It is because the configuration of this multi-key wallet is set to 2 out of 3 by X. Thus, even if one or more of the keys is lost or stolen, as, in this example, the wallet can remain secure.
Two-Factor Authentication
By creating a multisig wallet that requires two keys, anyone can create a two-factor authentication for their cryptocurrency account. For instance, one of the private keys could be stored on the user's computer and the other could be stored on the user's cell phone or written on a piece of paper. In these cases, only the person who holds both of these keys can access the cryptocurrencies.
However, using a multisig wallet as a two-factor authentication in this way can sometimes be risky. Especially a multisig wallet configured as 2 of 2 is dicier. Because if one of these keys is lost, it is impossible to access the wallet. To prevent this situation, it may be preferable to configure a wallet as 2 of 3 or to use a third-party 2FA service that works through backup codes.
Escrow Operations
By using a 2 of 3 multisig wallet configuration, a 3rd party, a mutually trusted arbitrator, can be found, and the escrow operation can be executed in case of problems between two people.
Decision Making
For instance, a board of directors may prefer multisig wallets to control access to company or firm accounts. In a 4 of 6 wallet configuration, each board member has a single-key. Thus, no one on the board can use these accounts for their benefit. Naturally, only decisions that are agreed upon and approved by the majority are implemented.
What Are the Disadvantages of Multisig Wallets?
Choosing a multisig wallet provides very successful solutions for different problems. However, users should keep in mind that there are some risks and limitations. Creating and using a multisig address can be a bit complicated and requires technical knowledge, especially if third-party helpers are not used.
In addition, since blockchain and multisig addresses are relatively new technologies, the relevant laws and regulations have not yet made significant progress. It is a factor that makes it difficult to obtain legal assistance in case of any problems.
