What Are Multi-Signature Wallets?
Multi-signature wallets are a type of cryptocurrency wallet with additional security settings that typically require two or more people to authorize an outgoing transaction. Sometimes called “multi-sig,” these wallets are most useful when cryptocurrency or other digital assets are owned by multiple individuals or are held in custody by a company.
These cryptocurrency wallets take more technical knowledge to set up and use than a traditional crypto wallet, which only requires one signature. However, the added security benefits make the additional technical requirements worthwhile for those with complex security needs.
Key Takeaways
- Multi-signature, or "multi-sig," cryptocurrency wallets require two or more people to vouch for an outgoing transaction.
- Multi-signature crypto wallets provide added security for crypto assets, but they also have more technical requirements to set up.
- Multi-sig wallets are designed to minimize the chance that digital assets can be stolen using only a password or wallet key for access.
- While well-suited for businesses or group-owned crypt assets, most individuals probably don't need multi-signature wallets.
Understanding Multi-Signature Wallets
To understand how a multi-sig wallet works, it's important to know how a single-signature transaction is signed. When a transaction is initiated on a blockchain, a signature is required to verify that the user owns enough cryptocurrency and has the private keys needed to create a transaction. In single-sig setups, only one user (the transaction initiator) signs a transaction. Signatures are hexadecimal numbers generated using a user's public key. Only the recipient of the transaction can decrypt it because their private key must be used.
Multiple signatures can be required to validate a transaction for more security. A wallet generates a multi-sig address and requires that a certain number of addresses from a given group of addresses must sign the transaction using their public keys. For example, if there are three addresses in the multi-sig group, only two of the three addresses need to sign the transaction. The blockchain programming aggregates these signatures into one signature.
Thus, a multi-sig wallet is a program that can initiate and receive transactions that require multiple signatures, which adds security and increases blockchain efficiency.
Any number of signatures can be required, but most multi-signature wallets rely on schemes where only a majority of requested signers must sign the transaction.
Multi-Signature Wallets vs. Other Crypto Wallets
Many cryptocurrency wallets rely on a single public address and private key. The public address is used to receive cryptocurrency, non-fungible tokens (NFTs), or other assets from others. A private key is required to access the wallet’s contents and send an outgoing transaction.
If you use a software or hardware cryptocurrency wallet yourself, it automatically stores and uses your addresses and private keys, so you only need to remember a PIN or password. Every wallet uses different software and encryption to keep your keys and crypto assets safe. But multi-signature wallets take this one step further by requiring multiple inputs to get to the private key.
For example, two users may have to unlock their individual wallets to get to the shared private key for the wallet holding the shared assets.
The most robust multi-signature cryptocurrency wallets require multiple physical hardware wallets to be unlocked. The user wallets each contain a portion of the underlying wallet’s private key or another access code that can be used in combination with others as a password or key for the primary wallet.
Goals of Multi-Signature Wallets
In the movies, you've likely seen a situation where two military members must turn keys simultaneously to activate a weapon. The idea is that a single person can't unleash the weapon alone. It takes agreement and coordination between two authorized people with the right keys. The goal of multi-signature wallets is somewhat similar.
If you deposit funds with a cryptocurrency exchange or crypto IRA provider, you likely don't want your assets held in the hands of a single individual or entity that could steal your currency and vanish. You would want two people to have to turn the keys at the same time to ensure that every withdrawal from the custodial wallets is authorized and used properly. Multi-signature wallets can enforce that requirement.
For most individuals, multi-signature wallets aren't necessary. Unless you're holding assets jointly with a spouse or friend you don't trust, you probably can stick with a traditional cryptocurrency wallet requiring just one password to open it.
Which Wallets Support Multi-Sig?
Some multi-signature wallets are Electrum, Arbitrum, and Guarda. There are many more available, so if you are looking for one, make sure you do your research because wallets can be programmed with malicious intent.
Can Multi-Sig Wallets Be Hacked?
Yes. All cryptocurrency wallets are programs that provide you with an interface to the blockchain you're using, and programs can be altered.
Are Multi-Wallets More Secure?
Transactions must be signed by multiple users, which makes them more secure. However, multi-sig wallets are still programs that require user names and passwords. Software and access credentials can be hacked and stolen, so while these wallets offer more security than other wallets, they can still be altered for malicious purposes.
The Bottom Line
Multi-signature crypto wallets require two or more people to approve an outbound transaction. These wallets are designed to limit thieves' ability to steal cryptocurrency by requiring more than one signature on transactions.
Individuals can use multi-sig wallets if they have people they trust as other signers, but multi-sig wallets are usually best suited for businesses or group-owned crypt assets.
