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What is a multisig wallet?

| November 17, 2023

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You bought your favorite crypto-currency, but where should you store it? You need a storage vault that keeps your crypto investments safe. Multisig wallet is something that fits your security, compatibility, and portability requirements. But what is multisig wallet? Multisig wallet is built to address the need for multi-key crypto storage technology that reduces the risk of fund mismanagement. Did you know? – Multisig wallet is not really a new technology. It existed long before the advent of crypto-currencies. But it emerged with the rise of Bitcoin. As the bitcoin price embarked on an upward trajectory, the demand for crypto-storage technology sky-rocked. Multi-sig wallet technology was first employed in unison with the core Bitcoin network back in 2012.

What is Multisig Wallet?

Multisig wallet is a digital wallet that generates a unique digital signature using multiple private keys. These multiple keys are utilized to authorize ownership and sign the ongoing transaction. It relies on multi-signature addresses to operate over blockchain protocols.

Types of Multisig Wallet

Multi-sig wallet can be configured into multiple combinations based on your custom requirement. There are essentially two main types: n-of-n and n-of-m. For instance, 2-of-3 and 3-of-4 can be categorized under n-of-m types of wallets where you only need “n” number of signatures out of “m” to approve a transaction. On the other hand, 3-of-3 and 2-of-2 can be categorized under n-of-n types of wallets, where you need all the signatures to approve a transaction.

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Upsides of Multisig Wallet

There are numerous notable upsides of multi-sig wallet:

Improved security

Multisig wallets are designed to deliver a higher degree of key protection. Getting access to multiple keys stored across multiple devices is relatively hard for any hacker. Diversification of keys across multiple storage media drastically reduces the risk of a single point of failure. Multisig crypto wallet helps investors restrict unauthorized withdrawals of digital funds. With Multisig Wallet, you don’t have to rely on a single entity or single device. In case you lose one of your keys, you won’t incur the risk of losing access to your funds – that’s what multi-sig wallets are built for.

Supports Escrow transactions

A structured legal agreement between two parties; where a trust-worthy external entity or a third party holds the digital funds up until proposed conditions are successfully met is referred to as an escrow transaction. For instance, consider your organization is going to employ a 2-of-3 multi signature wallet. It allows you to involve a trusted third-party in each and every transaction. The role of the trusted external entity is to escrow transactions between two parties. In case a dispute arises between both parties, the third party will get to make the final call.

Managing access to digital funds

Multi signature wallets make every individual key holder accountable for the funds under management. It is designed to offer an additive layer of security to your main crypto wallet. Such shared key model help ensure that the funds are not mismanaged or misused by a single key holder. Multi signature wallet doesn’t allow any one holder to unilaterally withdraw funds. It reduces the single point of failure. In fact, the institutional decision-making process becomes more decentralized and democratized as more key-holders get involved in the transaction and authorization process.

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Wallet management

A few years back, setting up a crypto-wallet was a tiresome process. Just to operate the wallet, you were required to have a technical understanding of the wallet architecture. It used to be hard for regular, less tech-savvy crypto-user to navigate the set-up stage. This is not the case anymore. Most of the latest versions of multisig wallets are easy to setup and easier to manage over the long term.

Downsides of Multisig Wallet

There are numerous distinct downsides of a multisig crypto wallet:

Speed

Transaction speed is of utmost importance when trading crypto over exchanges. Profit and loss, including costs, depend on your rate of executing a trade. When it comes to the wallet, for most users, the next important factor is security. Regarding crypto-wallet, it is essential to note that speed and security have an inverse relationship. Multisig wallets are often considered slow but secure compared to other types of crypto wallets. To execute a transaction successfully, multi-sig wallet owners rely on other users with private keys and signing authority, eventually slowing the transaction process. This is usually not an issue for institutional users who less frequently uses crypto-wallets. But, if you want to use funds frequently, then a multisig wallet might cause inconvenience.

Key recovery

Usually, the custodial crypto-wallets key recovery process is considered simple since the custodial service provider holds the private keys for you. In case, you lose access to your keys, the custodial service provider will provide the backup keys. And if you forget the password of the crypto-wallet, the custodial wallet provider will provide you with the reset password option. But, in this entire custodial key retrieval process, the security gets compromised. This is different with the non-custodial multi-sig wallet.

Even though multi signature wallet’s key recovery process is slow relative to other types of wallets. With a multisig crypto wallet, the integrity and security of the wallet remain untampered. In the multisig wallet’s key recovery process, you are only required to provide 12 to 24 words recovery phrase, which is uniquely assigned to each and every owner of the wallet. Since multsig wallets are non-custodial, you’re not required to share your private keys.

Conclusion

Institutional and retail asset holders can leverage the limitless capabilities of a multi-sig wallet. These wallets are shipped with customization features enabling you to explore a wide range of practical applications. On top of that, a multisig wallet lets you set up your own security steps making your storage experience simple and more reliable.

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