What Is the Difference Between a Single Signature vs MultiSig Wallet?

| January 22, 2024

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In the world of digital currency, prioritizing security is paramount due to its vulnerability to attacks. The current structure of the internet relies on numerous trust models and has, to a large extent, obscured privacy and security measures. As users of the internet, we often take our security for granted, assuming that someone else is managing it on our behalf. Consequently, when faced with the need to address security concerns ourselves, it can feel unfamiliar.

One might question the necessity for multiple steps in Bitcoin or Ethereum transactions, the emphasis on precautionary measures, and the significance of managing cryptographic keys. In the realm of Bitcoin and other cryptocurrencies, security is an individual responsibility, demanding a serious and proactive approach. It is essential to maintain a cryptocurrency security checklist and regularly assess security measures to close any potential vulnerabilities.

For many users, security considerations primarily center around the choice of crypto-wallets used for storing digital assets. Crypto wallets serve as significant targets for potential threats to funds, and any lapse in security can result in the loss of assets. When establishing a crypto-wallet, the choice typically lies between a single-signature wallet and a multi-signature wallet. Each implementation comes with its set of advantages and disadvantages, and the selection may depend on the specific requirements of different situations.

Definition of Wallets

A cryptocurrency wallet serves as an application designed to function as a digital counterpart to a physical wallet, where one typically stores cash and cards. In the context of cryptocurrency, this wallet holds the passkeys essential for signing your cryptocurrency transactions. It acts as an interface, facilitating access to your crypto assets.

These contemporary cryptocurrency wallets play a crucial role in making blockchain technology accessible to a broader audience. In the initial stages of cryptocurrency, the process of sending digital currency involved manually entering lengthy cryptographic keys. However, modern software has automated much of this process.

The genesis of cryptocurrency wallets traces back to Bitcoin’s developer, Satoshi Nakamoto, who created the first wallet. The second wallet belonged to Hal Finney, an individual who communicated with Nakamoto and is reported to have been the first to run the Bitcoin client software wallet. Nakamoto initiated the cryptocurrency movement by sending Finney 10 bitcoins as a test transaction. This marked the beginning of the widespread interest in cryptocurrencies.

Importance of Security in Cryptocurrency Transactions

In the event of a security flaw in centralized networks, attackers can gain access to a user’s account. However, the prospect of hacking into a decentralized crypto network is exceedingly challenging. This difficulty arises from the fact that attackers cannot steal a user’s cryptocurrency without obtaining access to their private key.

The primary reasons to ensure strong security of cryptocurrency are outlined below:

1. Balance Discrepancy:

Cryptocurrency networks consist of numerous nodes, each having a copy of the database. If an attacker manages to alter the balance on one node, it will differ from the balances stored on other nodes. This discrepancy creates an anomaly, resulting in the rejection of the compromised node’s displayed balance.

2. Signature Verification:

Every transaction in cryptocurrency requires valid signatures. Approval of a transaction by one node necessitates the presence of the signature for other nodes to validate it as legitimate. If a signature is absent, other nodes will reject the transaction.

3. Protection Against Double-Spend Attacks:

Cryptocurrency security safeguards against double-spend attacks, where compromising a node requires displaying a transaction history longer than that of all other nodes. This protection is reinforced by making such attacks financially prohibitive, with investments often surpassing potential returns.

How do Single Signature Wallets Work?

Single-signature wallets represent the most straightforward and widely utilized category of cryptocurrency wallets. In this context, “single signature” denotes a single private key linked to a user’s address, granting them absolute control over their funds. When initiating a transaction, the private key acts as both proof of ownership and authorisation to sign the transaction.

As the most basic form of cryptocurrency wallets, single-signature wallets are easily accessible to individual users with relatively modest volumes of digital assets for transactions. Their setup facilitates swift decision-making, remains uncomplicated, and offers an appealing ownership feature without reliance on external entities.

However, the vulnerability of single-signature wallets is notable due to their dependence on a lone private key, creating a singular point of failure. If the private key is compromised, the user’s wallet becomes susceptible to unauthorized access. Additionally, in the event of key loss or accidental deletion, all digital assets stored in a single-signature wallet may become permanently inaccessible.

What is a Multi-Signature (MultiSig) Wallet?

A multi-signature wallet, in the web3 ecosystem, necessitates multiple signatures—rather than just one—to execute each transaction. These signatures correspond to distinct cryptographic private keys, and a specified threshold of keys must sign a transaction to validate it.

The workflow of a multisig wallet remains consistent regardless of the number of signers. Any party involved in a multisig wallet can initiate a transaction signed with their private key. However, the transaction remains pending until other parties sign it.

Multisig wallets can adopt an N-of-N setup, where all signatories must validate a transaction. For instance, a 2-of-2 method requires both parties to validate a transaction for it to be considered valid.

Alternatively, an N-of-M setting demands a specific subset of signers to approve a transaction. Taking a 3-of-4 wallet as an example, three out of four signers must validate the transaction for it to be executed.

In either case, it’s crucial to distribute multisig private key access among distinct entities. A multisig setup where a single entity holds multiple private keys and stores them in a single location is essentially equivalent to a single-key wallet. The preferred approach is to grant access to entities in a manner that a single security breach does not result in the loss of two or more keys.

Many blockchains incorporate functionality that enables users to implement multi-signature wallets. Cryptocurrency exchanges and custodians also deploy multisig wallets, storing associated private keys in diverse locations to enhance the security of client assets.

Benefits of Single signature

User-Friendly – Access is easily obtained by setting up a single account (username and password), providing entry to multiple functionalities.

Efficiency – Only one signature is needed, saving time and offering convenience to users. This eliminates the necessity to create and remember multiple usernames and passwords.

Streamlined Access – Seamlessly transition from one service or functionality to another without the need for re-authentication.

Benefits of Multi-Signature

There are several notable advantages to employing a multi-sig wallet:

1. Increased Security:

Multi-sig wallets offer a heightened level of security compared to single-signature alternatives. Obtaining all the required keys for authorizing withdrawals from a multi-sig wallet is considerably more challenging for hackers. By reducing reliance on a single person, these wallets also mitigate the risk associated with depending on a single device. For instance, if the sole private key is on a malfunctioning device, access may be lost. However, with multi-sig keys distributed across several devices, the risk of losing a private key is generally minimized.

2. Escrow Transactions:

In traditional terms, escrow involves a legal arrangement where a third party holds funds until specific conditions are met. A 2-of-3 multi-sig wallet enables third-party involvement in escrow transactions between two parties (A and B). In this setup, the transaction includes a mutually-trusted third party (C) in case of disputes. If a dispute arises, only A or B can authorize the transaction, allowing C to make the final decision.

3. Two-Factor Authentication (2FA):

Multi-sig can serve as a form of two-factor authentication (2FA) since users can possess private keys on different devices. However, there are associated risks when using multi-sig technology as 2FA, as a device holding one private key can be lost, stolen, or damaged. For instance, in a 2-of-2 wallet signature scenario, losing a key on one device would render it impossible to recover funds.

Conclusions

Multi-signature (multi-sig) wallets and single signature wallets cater to businesses, organizations, and groups seeking shared access to on-chain digital assets.

While both wallet types have their respective advantages and disadvantages, in scenarios requiring shared control, multi-sig wallets generally offer superior benefits compared to single-sig wallets.

It’s worth noting that multisig wallets entail a slightly more complex initial implementation than single-sig wallets. However, this complexity is a one-time task, and the ongoing management of the wallet becomes more straightforward.

For businesses prioritizing easier implementation, multi-sig wallets could be a viable option.

This guide is intended to supplement your research and should not serve as the final decision-maker. It is always advisable to conduct thorough research independently before making any financial decisions.

 

FAQ

What is a single signature wallet?

Single-signature wallets feature a straightforward key management system, where a sole private key is responsible for executing transactions on the blockchain through signing. Complete control over the stored cryptocurrencies is granted to any entity with access to this single private key.

What is a multi-signature wallet?

A multi-signature wallet is a cryptocurrency wallet that mandates multiple signatures, rather than just one, for the execution of each transaction. Different cryptographic private keys are linked to these signatures, and a specified threshold of keys must participate in signing a transaction to validate it.

Why choose a single signature wallet?

Single-signature wallets are user-friendly and straightforward, making them a preferred option for individuals new to cryptocurrencies. Nevertheless, they come with certain security risks, as the loss or theft of a single private key can lead to the complete loss of all funds stored in the wallet.

Why choose a multi-signature wallet?

Multi-signature cryptocurrency wallets offer enhanced security for crypto assets, albeit with additional technical prerequisites for configuration. These wallets are specifically engineered to reduce the risk of digital asset theft, ensuring that access requires more than just a password or a single wallet key.

How does a single signature wallet work?

When you sign a transaction digitally, you are essentially affirming, “I am the rightful owner of the funds, possessing the key for their management, and I authorize this transaction.” Single signature, also referred to as “basic,” cryptocurrency wallets require just one signature to validate a transaction.

How does a multi-signature wallet work?

A multi-signature wallet in the world of cryptocurrencies demands the involvement of multiple signatures, rather than a singular one, for the execution of each transaction. These signatures correspond to distinct cryptographic private keys, and a predetermined threshold of keys must collectively sign a transaction to validate it.

Which is more secure, single signature or multi-signature wallets?

Multisig transactions offer heightened security compared to single-signature transactions. In a multisig transaction, a minimum of two signatures is necessary to authorize the transaction. This concept proves beneficial when ownership involves multiple parties, and the consensus of all parties is required to execute the transaction.

Are multi-signature wallets more complex to set up and use?

Setting up and using these cryptocurrency wallets demands a higher level of technical expertise compared to traditional crypto wallets, which only require a single signature. Despite the increased technical complexity, the enhanced security benefits make these additional requirements worthwhile, particularly for individuals with more intricate security needs.

Can a wallet be converted from single signature to multi-signature, or vice versa?

No, rather you can transfer funds from single signature to multi-signature wallet. To set up a multisig wallet the first step is to determine the number of signatures needed for transaction authorization. The second step is selecting the location for each wallet. The third step is establishing your wallet. Next step is safeguarding your recovery phrases. Finally, familiarize yourself with using the wallet.

Are there any specific use cases where multi-signature wallets are recommended?

These wallets are implemented to mitigate the risk of crypto theft that can arise when a single individual’s password or wallet key is sufficient to access the funds. Multi-sig wallets are typically most appropriate for businesses or collectively owned crypto assets, and they might not be necessary for most individual users.

Can multi-signature wallets prevent unauthorized transactions or hacking attempts better than single signature wallets?

On the contrary, multisig wallets necessitate a minimum of two private keys to sign a transaction, rendering them more secure than their single-signature counterparts.

More on Crypto

Digital Asset markets have taken a giant leap ever since their categorization from purely being a volatile alternate investment asset to now being a robust and regulated asset class. 

The journey of digital assets, most significantly that of blue-chip tokens like Bitcoin and Ethereum, has been nothing short of a protagonist in the fight against traditional financial systems, investment avenues, and age-old yield mechanisms. 

However, it was only after the introduction of regulation for these digital assets that they garnered huge institutional interest, pushing the scale of adoption and inviting the likes of family offices to partake in the “coming of age” story of investing in digital assets. 

In the underlying characterization of digital assets as the next best portfolio addition for institutional investors, with a significant boost kicking in after the launch of Bitcoin ETFs(with Ethereum ETFs also on their way), there are still reservations as to how to go about tackling the security, custody, and management challenges that come with them. 

To discuss how current market conditions are driving family offices to embrace portfolio diversification strategies that include allocating funds to digital assets, we dive deep into the intricacies of digital asset custody

Challenges In Secure Digital Asset Investing For Family Offices 

Family offices, traditionally known for their conservative investing approach, sit in the middle of the institutional investors’ branch, bringing untapped liquidity into the market. Conventionally, family offices used to rely only on safer investment bets to accrue value for their investments, but now they are increasingly dipping their toes into the dynamic world of digital assets. 

Despite the potential for high returns, family offices have historically faced significant challenges when considering digital assets as an investment class. Factors such as market volatility, regulatory uncertainty, and the need for established custody solutions have deterred many from fully embracing digital assets.

Talking about the key hurdles family offices face in navigating this exciting but complex landscape, here are some top-of-the-line challenges for them:

  1. Security Concerns: The nascent nature of digital assets presents unique security risks. Hacking, scams, and volatile markets can threaten portfolio stability. Family offices need robust custody solutions, advanced cybersecurity measures, and comprehensive risk management strategies to mitigate these threats.
  2. Regulatory Uncertainty: The regulatory landscape surrounding digital assets is still evolving, creating uncertainty and compliance hurdles. Family offices must stay updated on changing regulations and navigate complex compliance requirements across jurisdictions.
  3. Limited Expertise: Building internal expertise in digital assets can be time-consuming and expensive. Family offices often need more in-house knowledge and resources to properly evaluate, manage, and secure their digital asset investments.
  4. Lack of Infrastructure: Integrating digital assets into existing portfolio management systems can take time and effort. Family offices need secure and reliable infrastructure to seamlessly store, manage, track, and report on their digital asset holdings.
  5. Complex Valuation: Accurately valuing digital assets can be difficult due to their volatility and lack of standardized methodologies. Family offices need robust valuation frameworks and access to reliable market data to make informed investment decisions.

Enabling Family Offices to overcome challenges in digital asset custody

The promise of digital assets is undeniable, yet the hurdles for family offices can seem daunting. 

Overcoming the challenges mentioned above and finding the best probable solutions for them becomes a hardcore reality that must be dealt with utmost precision. 

At Liminal, we work extensively with institutions looking to go one step beyond simply investing in digital assets and look to operate them securely under all circumstances. The same logic applies to family offices as well. 

In our pursuit of building such a robust infrastructure solution, tailored to address the challenges faced by family offices fully and to empower them in their journey to moving to a new asset class for investment, we have created a comprehensive custody solution, integrated best-in-class security protocols and provide real-time monitoring and risk management services to proactively identify and mitigate potential threats, giving family offices peace of mind knowing their assets are secure.

  1. Security Concerns:

Fortress-grade custody: We leverage multi-sig and MPC wallets, leading asset-to-insurance ratios, and bank-grade security protocols to ensure the safety of your assets. Our CCSS Level-3 certification and FIPS-compliant hardware devices go the extra mile, minimizing security risks and providing unmatched peace of mind.

Advanced Cybersecurity Measures: Our vigilant team constantly employs 24/7 SOC monitoring, strict access controls, and penetration testing to identify and mitigate potential threats.

Comprehensive Risk Management: Our experts help you create and implement tailored risk management strategies, considering internal vulnerabilities, market fluctuations, and evolving threats.

  1. Regulatory Uncertainty:

Staying Ahead of the Curve: We have a dedicated team of compliance experts who stay abreast of evolving regulations worldwide. We integrate crucial compliance monitoring in our solutions such as KYC/KYB, AML, and Travel Rule checks, to help navigate complexities across jurisdictions and proactively adapt our services to ensure your portfolio remains compliant.

Streamlined Reporting: Our platform generates comprehensive compliance reports automatically, saving you time and resources while ensuring transparency and regulatory adherence.

Regulatory Partnerships: We actively engage with regulatory bodies and industry leaders 

to become accredited custodians. Currently, we hold a TCSP license in Hong Kong and have also received an IPA from ADGM for an FSP license for our Abu Dhabi entity. 

  1. Limited Expertise:

Your Digital Asset Knowledge Hub: Our team of seasoned custody, compliance, wallet, and security professionals offers expert guidance on evaluating, managing, and securing your digital asset investments. We share industry insights, educational resources, and ongoing support to enhance your knowledge base.

Dedicated Account Management: A dedicated account manager serves as your point of contact, providing personalized guidance and support tailored to your specific needs and goals.

Extensive Resource Library: Access easy onboarding docs, a curated developer section, seamless user-guiding workflow, and trending topic discussions through webinars, research whitepapers, and market reports to build your understanding of digital assets and make informed investment decisions.

  1. Lack of Infrastructure:

Seamless Integration: Our API library, Liminal Express, seamlessly integrates with your existing portfolio management systems, creating a smooth and efficient workflow for managing your digital assets.

Secure Storage and Management: We provide institutional-grade hot and cold wallets for self and managed custody infrastructure, eliminating the need to build or manage complex systems.

Automated Workflows: Streamline recurring tasks and automate key processes with our automation engine, with powerful functionalities like smart refill wallet, smart consolidation, and auto-sweep, enhancing efficiency and reducing operational burdens.

  1. Complex Valuation:

Reliable Data and Valuation Tools: We offer access to trusted market data providers and valuation tools tailored for digital assets, enabling you to make informed investment decisions based on accurate assessments.

Insurance-as-a-Service: We have collaborated with Costero brokers to provide the best possible insurance to our clients that covers their entire portfolio at the best market price. 

Asset segregation and transparency: We deploy segregated accounts, succession planning, and no rehypothecation of assets to allow family offices to maximize transparency and access. 

Embracing the Future Of Family Office Investing 

The future of wealth management includes digital assets. Family offices are actively exploring this burgeoning space, recognizing the potential for diversification and growth. Liminal Custody stands as your trusted partner in this journey. As a regulated custodian, we offer best-in-class security, industry-leading compliance solutions, and a dedicated team of experts, empowering you to invest in digital assets confidently.

Let Liminal Custody guide you through the process, making the path towards secure and compliant digital asset investment smooth and efficient. Contact us today and explore the new frontier of wealth management

Remember, while the potential is promising, navigating the digital asset landscape requires careful planning and collaboration with trusted partners. Liminal Custody is here to equip you with the knowledge and resources to succeed.

February 23, 2024

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

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