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What is a Multisig Wallet?

Experienced traders should know by now that bitcoin wallets are needed to trade BTC. However, smart traders know that when it comes to trading, security always comes first.

With that being said, the wide variety of digital wallets can often intimidate the knowledge-hungry trader. There are so many classifications of wallets—custodial and non-custodial, hot and cold, hardware and software, etc. Today, we’re going over the single key vs. multisig wallet.

Single-key wallets

Single-key wallets are pretty much the standard wallets you see everywhere. They’re heavily based on public-key cryptography—a system that makes use of keys to secure transactions.

In simple terms, single-key wallets make use of public and private keys. A public key is a code that allows users to receive coins by encrypting transactions, while private keys decrypt them. Private keys are what secures your account, only allowing people who have the private key to access the wallet.

Essentially, single-key wallets only require the credentials of one person (whoever has the private key) to be accessed—meaning a singular individual could sign transactions and transfer coins at will, without any other form of authorization. 

Multisig wallets 

A multisig wallet (or multisignature wallet), on the other hand, allows people to sign documents and transactions as a group. Multisig is a type of digital signature which is created through a combination of many unique signatures.

Although the technology wasn’t born in the context of cryptocurrencies, it was first applied to bitcoin addresses in 2012. As a result, multisig wallets were born the following year.

Imagine a dual-lock safe that you and your friend share—with each of you having your own unique key. Following the concept of multisig technology, you’d need to use each of your keys at the same time to open the safe—meaning that neither one of you can open the box without the consent of the other.

In the context of bitcoin and cryptocurrencies, funds that a multisignature wallet stores can only be accessed with the consent of the group involved. This feature, in turn, adds an extra layer of security on the wallet. By using a multisig wallet, users can prevent issues caused by a lost or stolen private key—the funds are still safe even if one key is lost.

Multisig wallets have many different combinations, with 2-of-3 being the most common—meaning only two out of the three unique signatures are needed to access the funds. Other combinations include 2-of-2, 3-of-3, 3-of-4, and so on. 

Why use a multisig wallet?

Aside from added security to your funds, there are many real-use applications for multisig wallets.

One real-use application is to create a two-factor authentication system for yourself. You can have one of the keys stored on your laptop, while the other one is stored on your phone. This system, in turn, ensures that only people that have both keys can access the funds. However, it’s important that you keep both of these keys safe, because if you lose one, you won’t be able to access your funds (especially if you’re using a 2-of-2 combination). If you plan to use your multisignature wallet as a decentralized cold storage vault, it’s recommended that you use a. 2-of-3 combination and keep all your keys safe—maybe even keep one of them with a trusted friend or relative.

Another real-use application is using a multisig wallet for escrow transactions. Let’s say Dave is buying a service or good from Kara. They both decide to use Dani as a mutually-trusted arbiter. Dave would first deposit the funds (with none of them being able to access it on their own). Once Kara provides the good or service to Dave, they can both sign in using their keys and complete the trade. Dani would only step in if there’s a dispute—in which case, Dani could then create her own signature that would be provided to either Dave or Kara, according to Dani’s judgment.

Multisig wallets are ideal for businesses that use a singular wallet to transact. By using this type of wallet, a board of directors (or whoever is in charge of the company’s finances) is the only one that is able to access the company funds. They could use a 4-of-7 combination, making it so that only majority-agreed decisions can be executed.

Single-key vs. multisig wallets

Now that you have an overview of both of these wallets, which one is better? Let’s go over the pros and cons.

Single-key wallets are faster and more accessible than multisig wallets—which is both a good and bad thing. It’s good if you need quick access to your funds, but if you lose your key, you could lose everything. However, as accessible as they are, they have a vulnerability in their system. Once cybercriminals take note of that, they’ll do everything in their power to exploit it.

As mentioned earlier, a multisig wallet is more ideal than single-key wallets for businesses involved with crypto. If the entirety of a company’s funds is protected by a single private key, it could pose many security issues.

Multisig wallets offer solutions to these gaping security issues—but that doesn’t mean they don’t come with their own set of disadvantages. They are very technical (especially if you don’t want to rely on third-party providers), therefore they’re not ideal for beginners. Additionally, the technology is still relatively new, so there still might be a few hiccups along the way.

The developing world of bitcoin

With multisig technology already in place in the cryptosphere, many popular exchanges have already looked into it. Paxful partnering with BitGo—one of the pioneers of multisig technology—is a great example of that. As the technology continues to develop, the world is going to start seeing more real-use applications for bitcoin—and multisig technology is just the tip of the iceberg.

Paxful Team

Paxful is a marketplace where people can buy and sell bitcoins directly with each other. You can get bitcoins instantly and pay with debit, credit, cash, Paypal and any currency.

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