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We all know that when trading bitcoin or other cryptocurrencies, security comes first. Today there is a wide variety of digital wallets: hot and cold, hardware and software, custodial and non-custodial, paper, desktop etc. Today we are going to find out what a multi-signature (Multi-Sig) wallet is, how it works and what are its advantages.
What is a Multi-Sig portfolio and how does it work?
If you have already read about what a wallet is, you will already know that cryptocurrency wallets maintain a secret string of letters and numbers called a private key or seed. This key is used to sign transactions, and they provide mathematical proof that the transaction comes from the wallet owner.
But, if the user loses his private key, he will also lose access to his wallet and his cryptocurrency funds.
The Multi-Sig (multi-signature) portfolio attempts to solve this problem.
It is a wallet that, in addition to allowing cryptocurrencies to be stored, is characterized by signing transactions in a more secure way than the single-key wallet.
Unlike single-key wallets, multi-sig wallets require two or more private keys before cryptocurrencies can be released.
To give you a practical example, imagine that the multi-sig wallet is a two-lock safe that you share with a friend and you each have your own unique key.
If you use multi-signature technology, to open this safe, you and your friend would have to use each of your keys at the same time. That is, neither of you can open the safe without the other’s consent.
To better understand how a multi-signature wallet works, we must first understand the concepts of Public Address, Public Key and Private Key:
Public address: When a user wants to receive funds, he discloses to the other party his public address (which is a hashed version of a public key).
Public key: a cryptographic code that allows users to receive cryptocurrencies in their accounts.
Private key: it is used to send cryptos and verify transactions and only the owner of the wallet needs to know it if he wants to keep his cryptocurrency funds safe.
Technically, the term Multisig refers to a type of digital signature that is created by a combination of many unique signatures.
This means that spending cryptocurrencies requires more than one signature (approval) for the transaction to proceed.
Imagine that we want to create a multi-signature wallet with three addresses. The three addresses have their public key, private key and public address.
To generate the public address of a multi-signature wallet, we have to provide the public key of the three addresses (public key 1, public key 2, public key 3) as input and define the number of signatures needed to perform a transaction (2 out of 3, 3 out of 4 etc).
A public address of a multi-signature wallet will be generated, which can be shared with the sender. All funds will be received at this address.
It is a technology that was born before bitcoin and was first applied to cryptocurrencies in 2012. The first multisig wallets were created and introduced in 2013.
With a single-signature wallet, cryptocurrencies are typically stored in a standard single-key address and the user who holds the private key corresponding to that address has access to the funds in that wallet, without requiring any additional authorization.
Despite being a simple system, when using a single-key cryptocurrency wallet, in the event of an attack, funds can be easily stolen.
With the introduction of multi-signature wallets, an additional layer of security is created as they require more than one key to open.
As I mentioned before, these wallet types allow us to choose how many keys are allowed to open the vault, as well as the minimum number of keys needed to unlock it (there are many variations, such as 2 out of 2, 3 out of 3, 3 out of 4, etc.).
Best multi-signature portfolios of 2021
Below we will show you some of the best multi-signature wallets of 2021 along with their features.
Developed in mid-2011, Armory is an open source wallet with cold storage and supports multiple signatures. To work, it requires a local copy of the blockchain to be downloaded to the same machine.
In Armory users control their private keys without relying on Armory or third party servers. It allows users to create multi-signature addresses using Lockboxes in a fully distributed manner.
This wallet provides up to 7 out of 7 authorizers to sign a Bitcoin transaction.
This is a wallet developed specifically for multi-signature use. It can create wallets of up to 6 of 6 addresses.
In Copay there are no third party servers and the user is the owner of his private keys. A very interesting feature of Copay is that it is the first to provide test networks. That is, before using it you can test how the multi-signature wallet works.
It is the most popular desktop wallet with cold storage and multi-signature features. It is an open source project released under an MIT license, which means that anyone can run a Bitcoin node with Electrum.
It is a very secure and fast portfolio.
Why use a multi-signature wallet?
Here we will explain why it is advisable to use a multi-signature wallet when storing your cryptocurrencies.
- Multisignature wallets have many advantages in terms of security. In fact, while single-key wallets are faster and more accessible than multi-signature wallets and guarantee the user quick access to his funds, on the other hand, if the private key is lost, the user could lose all his funds.
This is why the multi-sig wallet is widely used by companies that work with cryptos, such as exchanges, since they need an additional layer of security, being in many cases custodians of their users’ funds.
- With a multi-sig wallet, if a private key is compromised, the funds in the wallet are still secure.
For example, if a multi-sig 2 of 3 address is created, we can store each private key in a different location (PC, USB stick, cell phone, piece of paper). This way, if one of the devices used to store the keys is hacked, the funds will be safe as the hacker most likely only has access to one device and one private key.
- If you lose a private key, you will still have access to your funds as you will have other possibilities to access them using another key.
According to the Wall Street Journal, one-fifth of all Bitcoin is permanently lost. The multi-signature wallet attempts to solve this problem.