What is a Multisig Wallet?

Most of the crypto people have used a wallet now and then. We know that before we initiate a transaction, we need to sign it with our private key. A Multi-Signature or Multisig wallet is a crypto wallet that requires multiple private keys to authorize a transaction instead of a single key. This is to ensure extra security and prevent access from malicious players. Such wallets are a good option for the users or business partners that want extra security for their funds. Business partners can use them to protect their shared funds.

Such a wallet requires more than 1 (at least 2 or 3) private keys before a transaction can be approved. For example, a 2-of-3 multi-sig wallet means at least 2 out of 3 private keys are required to approve a transaction.  

Common Multisig Wallet Configurations

Common multisig wallet configurations are 2-of-3, 3-of-5, and 4-of-7. While a 2-of-3 is used by small companies and businesses, a 3-of-5 configuration is used by bigger teams and crypto treasuries. 4-of-7 are mostly used in high-security environments. A 2-of-3 configuration is better than a 3-of-3 because that would require all the participants to sign but if one of them is not there, the transaction would not go through.

How Do Multisig Wallets Work?

Let us understand with the example of a 2-of-3 wallet:

When a multisig wallet is created, it does not auto-generate private keys like other crypto wallets. Instead, each of the users (3 in this case) already has an existing wallet like MetaMask, Ledger, or some other crypto wallet. So, each participant has his unique wallet address and private key. One of the three participants creates a multisig wallet and inputs the wallet address of all three owners. This means, if there are 3 people, 3 addresses are entered in the wallet. A threshold of approvals, i.e. 2-of-3 is set; this decides the number of approvals required for approving a transaction. No new private keys are created, each owner simply uses his/her existing wallet to approve transactions.

Each of the addresses or the public keys of the owners is stored in a smart contract. This multisig wallet contract is then deployed to the blockchain. And each of the owners has a private key that s/he controls.

Example of Creating a Multisig Using Gnosis Safe

Gnosis Safe or simply Safe is a web application that lets users create and manage multisig wallets using a browser. 

Open the Safe Web app and click Connect Wallet.

You are prompted to connect a wallet. Select one and connect it to the app. 

Once connected, your wallet address is shown on the top right of the app. This is the first signer's address, i.e. the participant who initiated this wallet creation. The rest of the signers' addresses would be added later on. Click Continue with....

A window to create a new Safe Account is displayed. Enter a name for your Safe Account. Select all the blockchain networks that need to be associated with your account. Click Next. 

Enter all signers' names and their wallet addresses by clicking Add New Signer. The address of the first signer (who initiated the wallet creation) is already added, as we mentioned previously. 

Also, select the threshold (number of participants or signers required to approve the transaction) from the dropdown list. Click Next. 

To create an account, you need to pay a small fee for its activation. You can select to pay later on when you do your first transaction. Click Create Account. 

Now that your account is activated, you need to activate it. 

To activate, under "Activate account on Ethereum, click Activate now. 

The app shows the approximate network fee you need to pay to activate your Gnosis Safe multisig wallet account. Click Activate. 

Advantages of Multisig Wallets

• It provides extra security; even if one private key is stolen, the hacker is not able to steal funds as he has no access to the remaining private keys.
• A multisig wallet prevents a single point of failure. In general, if a user loses his private key, he is not able to access his funds, But in a multisig environment, losing a private key by one owner, the funds are accessible as the other owners still have their keys.
• Such a wallet can be used in an escrow service where two parties need not have trust in each other. In case of a dispute, the third-party arbitrator holds an additional key.
• This wallet is useful in special setups that require extra security; it is apt for businesses, DAOs (Decentralized Autonomous Organizations), and investment funds where multiple stakeholders are needed to approve a transaction.

Cons of Multisig Wallets

• Setting up such a wallet is a complex process and requires technical knowledge. Early users of crypto may find it difficult to understand how it operates.
• Multiple owners need to sign the transaction, which makes the process slow.
• If all the threshold keys are lost, access to the wallet is lost forever.

Examples of Multisig Wallets

• Bitcoin Multisig Wallets: Electrum and Armory
• Ethereum Multisig Wallets: Gnosis Safe and Safepal
• Multi-Currency Multisig Wallets:
  • BitGo (Enterprise wallet, mostly used by crypto exchanges)
    Centralized Exchanges(CEXs) like Binance and Coinbase use multisig cold wallets to store large amounts of funds securely and require multiple authorized employees to sign the transaction before execution can take place.  
    Decentralized Exchanges (DEXs) like Uniswap and SushiSwap use smart contract-based multisig wallets to manage liquidity pools.
  • Casa (secure solution for the holders of Bitcoin)

To know the best cold wallets that can keep your cryptocurrency safe, read this.