Traditional crypto wallets require you to input one private key when sending digital assets to another wallet. Hence, they are known as single-signature wallets. They can be custodial, non-custodial, hot or cold wallets, but they are all single-signature. This means that only one private key is required to authorise transactions.
While these wallets are relatively secure, they have a single point of failure. If that one private key is forgotten or compromised, you could lose your crypto holdings forever. That’s a considerable risk, especially if you have an extensive portfolio of digital assets. This is where a multi-signature or multisig wallet can help.
What is a multi-signature wallet?
Well, the name is quite self-explanatory; it is a wallet that can be configured to have two or more private keys. They can also be set up so that one or more private keys are required to access the wallet and authorise transactions. This means a group of users may be required to approve transactions jointly. But why would such an arrangement be needed? Let’s find out.
Why are multi-sig wallets needed?
While it is much easier to access a wallet with one private key, losing that key could mean trouble for you. Anybody with your key could access your crypto assets and transfer them out of your wallet using the same key.
Moreover, business transactions that involve cryptocurrencies need multiple approvals. A single-signature wallet would not be suited for such asset transfers. Entrusting one person with the key would mean making them the sole custodian of large sums of money, which is most definitely not the right way of going about it.
Multi-sig wallets also come in handy when escrow transactions are executed, as a third-party custodian becomes involved in the process, and sole control of the funds cannot be parked with that third party. Multi-sig wallets solve these problems of security and asset protection.
Types of multi-sig wallets:
Multi-sig wallets can be created in several ‘n-of-n’ formats. The first ‘n’ is the number of private keys required to access the wallet and authorise transactions. The second ‘n’ is the total number of private keys associated with the wallet.
Here are the most popularly used combinations:
| Wallet Type | Usage |
| 1-of-2 | The wallet has 2 private keys & any 1can be used to access it. |
| 2-of-2 | The wallet has 2 private keys & both are required to access it. |
| 2-of-3 | The wallet has 3 private keys but can be accessed with 2 keys. |
| 3-of-3 | The wallet has 3 private keys & all 3 are needed to access it. |
| 3-of-4 | The wallet has 4 private keys but can be accessed with 3 keys. |
Multi-sig wallets can be configured for other combinations, such as 3 of 5, 5 of 6, 5 of 7, etc. It all depends on how many layers of security you wish to add and how many people need access to the wallet.
Of course, the different types of wallets can also have different use cases. For instance, a couple wanting shared access to a single wallet can opt for the 1-of-2 multisig wallet. This can also be helpful if one of them meets with an untimely demise. Parents who want to oversee their child’s crypto investments can use the 2-of-3 setup. Multisig wallets with multiple private keys are ideal for businesses.
Benefits of multi-sig wallets:
There are several benefits to using multi-sig wallets
Security & Accessibility: Multi-sig wallets prevent the problems caused by the loss or theft of a private key while ensuring robust security.
2-Factor Authentication (2FA): Two separate accounts don’t need to hold two private keys. One user can opt for 2FA and hold two keys for his own wallet. However, it must be noted that losing one of the keys, in this case, does not allow you to access the wallet, and your funds could be lost.
Joint Decisions: A company’s funds can be accessed by the members of its board through a multi-sig wallet as it allows no single person to siphon off funds without the others’ knowledge.
(Edited by : Anand Singha)
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