Multisig Wallets: What They Are and When You Need One

Looking for a better way to safeguard cryptocurrency or NFTs, for yourself or your organization? You should be–if you have high-value assets or are conducting large transactions.

Nearly $3.8 billion was lost to cryptocurrency hacks in 2022 alone. That’s a 58 percent increase from the previous year, the bug-bounty platform Immunefi reports. While all eyes may be on the FTX fraud, in fact, more than 95 percent of all crypto losses last year came from hacks.

As Web3 evolves, users confront two problems in securing their growing digital assets. First, it’s all too easy to fall victim to fraud. Thieves have many tricks that deceive users into giving up their private keys, from romance scams to malicious links in Google ads. All it takes is one click to a fraudulent website, and you quickly find your assets have been drained.

Second, it’s challenging to manage finances for a distributed organization. You need the power to prevent a single team member from emptying the group’s joint account, and you may want to manage your assets by a group process.

How can you keep a large stash of crypto from being stolen? And how can crypto become easier and more secure for a group to use? The answer to both questions may be to use a multisignature, or multisig, wallet.

What is a multisig wallet?

In traditional banking, there are joint accounts where you have the option of requiring signatures from both parties to write a check or withdraw funds. Multisig wallets employ a similar principle. A multisig wallet requires two or more private keys held by different parties to execute transactions. Requiring multiple signatures allows the wallet’s users to agree on a course of action together. They can be used, for example, to enable a DAO to manage a joint account.

With multisig, a wallet’s various owners can store their private keys in different geographic locations, or on different devices. An attacker would need to obtain multiple dispersed keys, which is more difficult.

Multisig wallets are implemented on-chain, regardless of the particular type of multisig wallet you select. For example, Ethereum implements multisig wallets using smart contracts, and Bitcoin implements them using scripts.

Types of multisig wallets

There are two basic types of multisig wallets. They can be described as:

• n of n: In this setup, all the keys associated with the wallet must be used to execute a transaction, as in 2 of 2 keys or 3 of 3. It’s important to note that in this case, if any one multisig wallet user loses their keys and can’t recover them, all users would lose access.
  
• n of m: In this setup, only some of the keys associated with the wallet are needed in order to transact, as in 2 of 3 or 4 of 6. This allows more flexibility even if every user isn’t available. It also provides some protection against the wallet becoming inaccessible if a single user loses their keys. Just be sure to require a reasonable number of required keys in case some get compromised like in the Horizon bridge attack.

Your choice here will be determined by whether unanimous decisions are required to transact, or only a majority of users.

Multisig wallet configuration options

Once you’ve decided which type of wallet you want, you have to select a multisig wallet that meets your requirements. You’ll need a wallet that supports the number of signatures you want. Not all allow as many as six, for instance.

Another decision is whether you want a hardware or software wallet for this purpose. Some multisig wallets exist only as a browser extension. Others are hardware wallets that you keep offline except while transacting, and must securely store.

Multisig wallets may be custodial–where a third party stores at least one of the private keys–or completely non-custodial, leaving each user to each store their keys. Some crypto owners keep a separate, multisig wallet only for their largest amounts and transactions.

Finally, some multisig wallets only support particular types of cryptocurrency, such as bitcoin, while others will accommodate multiple coins. Here’s a list of popular multisig wallets that includes many of the options described above.

Your users or organization will have to agree upon the configuration of multisig wallet that’s right for your situation. See our Wallets 101 post for more thoughts on wallet selection in general.

Advantages and disadvantages of multisig wallets

The primary advantages of employing a multisig wallet are the added security multiple signatures offers and the flexibility to manage funds jointly by a user group or organization with relative ease. Requiring multiple signatures eliminates the “key man” problem, where a single person could drain the account or disappear with the only key.

Multisig wallets are more difficult to hack due to their multiple-signature requirements. For distributed organizations that collaborate on a project, multisig wallets provide a way to manage funds and distribute proceeds to participants.

The disadvantages of multisig wallets are also significant, which is why they’re usually used by organizations or individuals with higher stakes. In the case of individual multisig wallet owners, there’s the challenge of deciding who else you trust to access your account and keep careful track of their keys.

Obviously, it’s inconvenient to round up multiple people to execute a transaction. Delays in getting everyone to authorize a transaction could result in lost opportunities. Users may live in various time zones, making it hard to coordinate and act in concert.

With n-to-n wallets, every member’s keys are essential to the wallet’s continued operation. You have to trust every user to take great care not to lose their information.

Security measures for multisig

While requiring additional keys conveys another layer of security, it’s not foolproof. All co-owners of the account will need to take appropriate security measures to protect their private keys, or the account could be compromised.

• Only invite trusted parties to be co-owners of your multisig wallet
• Never share your private keys with anyone
• Keep your private keys offline and in a location separate from any hardware wallet or computer where a browser-based multisig wallet operates
• If using a hardware wallet, make sure it’s kept in a secure location

When to use a multisig wallet

If you’re part of an organization that needs to manage digital assets as a group, a multisig wallet may be a good solution. It allows you to ensure that there’s consensus around transactions and that assets can’t be withdrawn by a single member.

As an individual user, a multisig wallet may be appropriate if you’re storing or trading valuable assets that you think need additional protection. While multisig wallets offer additional security, the complexity of operation and the extra work required to obtain multiple signatures should also be carefully weighed.

You should also be aware that multisig wallets are not the only option for enhanced security and group management. There are other advanced options, such as Threshold Signature Scheme (TSS), that we’ll cover in future posts.