How Multisig Implements Trust In Digital Agreements

By 0xVince | Bitcoin Protocol | 7 Mar 2022

Multisig (Multi-Signature) is a software feature that adds more security to Bitcoin wallets. By standard design, only 1 private key per wallet can authorize the release of Bitcoins (or a Bitcoin). This means a private key can only be used by one account, which is the Bitcoin holder’s public address. This is what identifies a BItcoin user on the network, which other users can use to send them Bitcoins. The multisig feature allows multiple users to have control of Bitcoins, as a security enforcement method.

Normally Bitcoins that are locked in a wallet address can only be unlocked by a user’s private key by authentication using a digital signature. With multisig, using techniques like smart contract scripts, Bitcoins can be locked up in a wallet that requires multiple digital signatures to unlock. A script can be written to enforce a rule that requires m of n digital signatures to unlock the Bitcoins. If the criteria is satisfied, that m digital signatures have authorized release, then the Bitcoins can be released. Otherwise it remains locked. More strict rules can require n of n digital signatures, or all n accounts before Bitcoins can be released.

How Bitcoin Transactions Work

Let us begin with an example of how Bitcoin transactions work in order to understand multisig concepts. Bitcoin requires users to have a wallet, which is the account that holds a private key. The private key generates a public address for that account which is made available to other users. The main purpose of a private key is to authorize transactions made by the user with what is called a digital signature. This signs the transaction on behalf of the user to authorize the release of Bitcoins to be sent to another user.

If a user wants to send Bitcoins, the Bitcoins are sent to the other user’s public address. Before the Bitcoin is sent, it is actually locked by the sender using the public address of the other user’s account. This uses an encryption technique which secures the Bitcoins and prevents different users from accessing it. Once the other user receives the Bitcoin, they unlock it using their private key and it is considered transferred to that user’s account. Only the user who owns that public address can unlock the Bitcoins.

How Multisig Is Implemented

Think of multisig like a joint bank account, in which x number of people are owners. There can be 3 people named Alice, Bob and Carol. The rules state that the account recognizes any of the user’s digital signatures. Developers can create other sets of rules, depending on the requirements. For example, in order to release funds, a rule can be set that requires only 2 out of the 3 (m of n) digital signatures. That means if only Alice and Carol sign off, the Bitcoins can be released. It will not require the digital signature of Bob even though he is one of the authorized accounts.

This enforces rules that create a trustless escrow that does not require third party arbitration. If one of the account holders is a bad actor, the rules will prevent them from taking out all of the Bitcoins since it requires (m of n) digital signatures. This discourages the account holders from performing bad faith acts that can affect the funds stored in the Bitcoin wallet. This can help trust funds and corporate management of money when it comes to settlements.

Use Cases

The first and most important use case of multisig is enforcing trust in a system. With Bitcoin you have a trustless system, which means it doesn’t require two parties to know each other but they can directly transact. That is in contrast to the current financial system where trust is determined by a third party like a credit card company. The buyer and merchant create trust through the approval of the credit card company, which authorizes the transaction. With Bitcoin, trust between the buyer and merchant is not via a third party. It is through cryptography via the buyer’s private key and the merchant’s public address. The transaction cannot be tampered with because of the security provided by cryptographic means in the Bitcoin software. Thus, it builds trust knowing that what the buyer has authorized is true based on their digital signature.

This is an effective way to implement trust in the allocation of funds. A Bitcoin wallet can be created to lock a certain amount of funds for specific purposes. This can be a trust fund for inheritance to the surviving relatives of an estate, locked in a Bitcoin account wallet. If the owner of the estate passes away, the funds can be unlocked and released to the beneficiaries of the estate only by authorized account holders. This can require the digital signature of a lawyer, a non-relative participant and a member of the estate owner’s family. This prevents anyone from taking control of the entire fund since there are rules set for its release. If it were done in the traditional sense, it could lead to more disputes without a clear settlement. Even such cases can be challenged, but at least when it is locked no one can access the funds.

With multisig trust, it can be implemented for corporate management of funds used for projects, budget expenses and other funding methods. Corporations that do business with other corporations can create multisig wallets to authorize the release of funds to finance projects that both corporations are involved in. Bitcoin also tracks the history of these transactions, so it can be easily audited due to transparency. This discourages any sort of money racketing or swindling of funds from taking place. 

Key Takeaways

The main benefits of multisig are for securing the management of funds that don’t require intermediaries. It creates a trustless settlement that can be automated without requiring the need for third parties who at times can interfere or take a cut from the funds. While Bitcoin implements scripts to create multsig contracts, it cannot enforce the actual settlement, only the rules. 

If the conditions are met, and the Bitcoins are unlocked, that is as far as multisig goes. If there is any dispute or conflict afterwards, that is not the responsibility or fault of using multisig. That is a totally different issue that needs to be resolved by those involved. Developers can create more scripts to prevent such incidents, but that requires a design that should be agreed upon by all parties. 

The security multisig provides can help in corporate mediations when it comes to fund management. Handling large amounts of money is a big responsibility so it has to be accounted for. Multisig helps with securing the funds so that it will require the consent of more than one account holder to unlock and release. The transactions are also recorded on a blockchain for transparency purposes, so it should discourage the account holders from performing any malicious acts. What it adds is a layer of security that normally does not exist in traditional finance, so it can help improve trust in corporate management.

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