Multisig Wallets vs MPC Wallets, Where Do They Fit in the Grand Scheme of Wallet Infrastructure

| November 17, 2023

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Multisig Wallets vs MPC Wallets

Crypto wallets are an essential part of the cryptocurrency ecosystem as they enable users to manage and interact with crypto assets by storing associated private keys. The private key is responsible for signing all transactions and represents absolute ownership of all associated on-chain assets. Anyone with access to the private key will have complete control over the assets allowing them to transfer to any other wallet of their choice.

In a conventional setting, each crypto wallet holds a single private key to sign transactions. These wallets are known as single signature wallets and are most suitable for individuals. Single signature wallets offer decent protection to the stored assets as long as the private key is not compromised. However, single-signature wallets aren’t suitable for managing a pool of assets with shared ownership as anyone with access to the wallet can transfer funds without needing any permission or authorization from other owners. A similar case applies to crypto platforms and other organizations managing large amounts of funds in crypto assets.

Also, single signature wallets present a single point of failure as in the event the private key gets compromised or lost, the owners will potentially end up losing all the funds stored in those wallets due to the absence of any additional safeguards.

Multi-signature and MPC wallets present an attractive alternative to the more conventional single-signature wallets as they need multiple users to sign any transaction. By setting up a group of authorized signatories, crypto platforms and enterprise wallet, users can ensure accountability and oversight of transactions. They also introduce redundancies, protecting funds from hackers and cybercriminals, as the chances of all signing credentials being compromised at the same time are almost impossible.

Multi-Signature Wallets

Popularly referred to as multisig wallets, multi-signature wallets are cryptocurrency wallets that require more than one signature to execute transactions. The transaction signing authority lies among the members of the trusted group created at the time of wallet setup. In addition, the user can also specify the minimum number of signatures needed to execute any transaction. The minimum signature threshold can be lower than the total number of people in the trusted group. Each member will have their own private key, and anyone from the group can partially sign the transaction until the requisite number of signatures is fulfilled. Once the signature threshold is reached, the multisig wallet will execute the transaction.

Multisig wallets can be set up in any “m” out of the “n” combination where “m” is the signature threshold to execute transactions and “n” signifies the total number of users or private keys that are part of the trusted group. The flexibility offered by multisig wallets allows transactions to proceed even if one more private key is lost as long as the rest of the members can fulfill the signature threshold set for that particular wallet. Further, multiple people signing a single transaction will ensure the accuracy and legitimacy of each transaction, effectively preventing a single person from unilaterally transferring funds out of the wallet.

Multi-Party Computation (MPC) Wallets

Like Multisig wallets, Multiparty Computing wallets or MPC wallets make use of cryptographic data from multiple devices to sign and execute transactions. However, instead of using multiple private keys like their counterpart, MPC wallets split a single private key into smaller parts using algorithms. These individual fractions of the private key are generated on the devices that are a part of the MPC setup. Using computation, these individual parts across various devices form the whole private key allowing to creation digital signature needed to execute the transaction. MPC enables the signing of transactions while keeping each member’s key share a secret never to be revealed to another member of the group. A quite popular and useful feature of these wallets is that they generate dynamic private keys for every transaction, making them highly secure.

Even in the case of MPC wallets, more than one person will be involved throughout the transaction initiation and execution process for accountability and oversight purposes. However, unlike multisig wallets, MPC wallets are mostly based on proprietary software and dependent on third-party support for setup and maintenance as the need arises.

Multisig and MPC Wallets in An Enterprise Setting

Crypto platforms implement a combination of wallets as part of their enterprise wallet infrastructure to secure their assets. They generally use cold wallets for storing the bulk of their assets, hot wallets for storing just the right amount of assets needed to meet the liquidity demand, and warm wallets for easing the transaction process between the cold and hot wallets due to the sheer volume. Implementing multisig and MPC wallets as part of the wallet infrastructure makes a lot of sense as they contribute toward enhanced operational security. However, their implementation in the enterprise wallet infrastructure must be considered carefully to prevent needless issues.

Multisig and MPC Wallets Have Limited Roles in Enterprise Hot Wallet Infrastructure

Hot wallets are considered the most vulnerable link in the enterprise wallet infrastructure, making it necessary to augment their security by using the most suitable setup that strikes a balance between quick transaction processing abilities and security. Using a multisig wallet to affect withdrawal requests or sweep in funds from a deposit wallet to a cold wallet may be an overkill that requires more human intervention than necessary. As a result, multisig wallet setups are more appropriate when it comes to refilling hot wallets from warm or cold wallets, whereas MPC wallets are ideal for automated functions like sweeping funds from deposit wallets to cold or warm wallets.

A hot wallet supporting withdrawals exists to provide instant liquidity to its users, something that would not be possible if these wallets were secured with multiple keys. It would take a considerable period for all members of the party to sign transactions, thereby defeating the purpose of a hot wallet’s existence in the infrastructure. However, a multisig setup would be ideal for cold storage purposes.

Why MPC Wallet Setup Shouldn’t Be Used with Enterprise Cold Wallets!

MPC wallets are secure, there is no doubt about that. But in an enterprise setting, especially when it comes to managing large amounts of funds, the need for accountability and redundancy is very important. While transactions from MPC Wallets require multiple signatures, each signifying a portion of the single private key, there is no way to track the ownership of each key used in a transaction. In an “m” out of “n” setting where “m” signatures out of total “n” signatures are needed to execute a transaction, anyone can sign the transaction without others ever knowing who signed them. It opens the doors for collusion between multiple signatories, leaving funds vulnerable to insider fraud or mismanagement. Further, the lack of transparency surrounding the encryption standards and implementation of MPC wallets due to their proprietary nature and lack of HSM compatibility restricts the extent to which the security can be enhanced.

Each MPC wallet setup is generally specific to individual crypto assets either due to lack of compatibility or technical advancements. As a result, crypto platforms supporting multiple crypto assets will have to operate multiple instances of MPC wallets, which will be resource and cost intensive as compared to HSM-secured conventional multisig wallet setups. Even when it comes to withdrawal wallets, using MPC or even multisig wallets with more than 2 signatures ends up disrupting a smooth user experience, especially where a large number of user transactions are involved.

Find the Right Fit with Liminal

Liminal’s crypto asset custody and management solutions leverage the advantages offered by HSM-based multisig and MPC wallets to provide optimal security without impacting operability. The Smart Cold Wallet solution uses HSM-secured multisig wallets as the foundation with additional security features, including whitelisted addresses and third-party signing with an HSM-based Liminal Signer. With this approach, the platform takes complete advantage of protocol-level support, open-source, and low-cost infrastructure implementation offered by multisig wallets. It reduces dependencies on third-party vendors, allowing crypto platforms to always maintain complete control over their assets and processes. Meanwhile, the MPC wallet infrastructure is extensively used by Liminal to secure hot wallets, enabling automation of withdrawals and transfer of funds from deposit wallets to more secure warm wallets or cold wallets for safe custody.

Liminal’s offerings work seamlessly with third-party wallet infrastructure as well as its own suite of wallet infrastructure products like automated Smart Wallet Refills to provide end-to-end wallet management solutions.

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More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture