How Multi-Signature Wallets Are Changing Cryptocurrency Security Standards

Despite the recent upsets in the cryptocurrency world, its allure has persisted, especially among young investors. In fact, many companies accept cryptocurrency payments to tap into the tech-savvy demographic. However, with an estimated market cap of over $3 trillion according to Forbes, a lot of money floating around in the ether can disappear in a flash due to security breaches and malicious actors. It’s no wonder that security is a serious priority for cryptocurrency holders.

One of these security concerns involves handing over complete control of funds to an individual or a company. Sharing access to a crypto wallet might not be typical for most crypto users. However, there are instances when it is necessary, such as putting crypto funds in escrow or holding business assets in cryptocurrency. A traditional cryptocurrency wallet typically requires a single private key to access the funds, giving anyone with access to it complete control over the stored coins.

A good solution in these cases is to use multi-signature wallets. This article will explain what it is and how it changes cryptocurrency security standards.

What Is a Multi-signature Wallet?

Multi-signature or “multi-sig” wallets hold cryptocurrencies like a traditional single-sig XMR wallet. However, a multi-sig wallet requires two or more (hence “multi”) parties to authorize a transaction. You can think of it as a checking account that requires a specific number of signatures on a check to make it valid. Multi-sig wallets come in when multiple people or a company with various stakeholders have a claim to or custody of shared digital assets.

While the technical requirements for setting up a multi-sig wallet are more complicated than those for a multi-sig checking account, the basic principle is the same. Two or more people have to sign off on a multi-sig account in order to transact using it. The idea is to ensure that no one person or entity can access funds without the approval of other account holders. In the case of a multi-sig crypto wallet, it boils down to the conditions set forth in a smart contract.

The main difference between a multi-sig wallet and a multi-sig checking account is that a multi-sig wallet does not actually require a name signature. It requires a digital signature made up of a string of characters generated by the user’s private key authorizing the transaction. In a multi-sig wallet, you need two or more of these signatures.  

The number of multi-sig wallet users capable of generating these signatures may be more than the required number for specific transactions. For example, there may be five stakeholders in the company with access, but only three are needed to trigger the smart contract to authorize a transaction. The transaction gets broadcast to the blockchain network only after the requisite number of signatures is collected.

How Multi-Sig Wallets Enhance Security

Because multi-sig wallets require several private keys to execute a transaction, it significantly reduces the risk of unauthorized access to the assets. Suppose a hacker manages to get one private key for a multi-sig wallet. They still need to find a way to get the other requisite private keys to access the account. While this is the most common concern mitigated by requiring multiple signatures for a transaction, there are other security factors that multi-sig wallets affect.

Accountability

Multi-sig wallets are most viable in situations where multiple stakeholders collaborate to manage one cryptocurrency wallet. For example, a company that offers escrow services for cryptocurrency transactions keeps those assets in a multi-sig wallet. The funds stay in the wallet until the requisite number of executives approve the release of funds.

In that scenario, no one person holds the responsibility or the blame for missing money. All individuals who provided their signatures will be held accountable, keeping stakeholders on the straight and narrow.

Customizability

A multi-sig wallet is flexible when determining the conditions for executing a transaction, depending on the circumstances when one is necessary. Suppose you are designating a family member to hold a sum of money in trust for your child to be released under specific circumstances. You can choose however many required users for a multi-sig wallet to hold the funds and have a trusted third party (like a lawyer) holding a private key. The funds can be accessed as long as the required number of signatures are provided based on the agreement. This makes it so that no one party can make unilateral decisions.

Redundancy

Imagine a situation where access to a crypto wallet is lost because the one person with access dies, loses the key, or is otherwise unable to provide it. It's not so bad when it's an individual private stash, but when it involves millions of dollars in client funds lost, then that’s a disaster. Also known as the key person risk, it is a very real concern with crypto wallets because it makes it very difficult to access the account once this person is compromised. As such, a multi-sig wallet ensures redundancy and reduces the key person risk significantly.

Should You Use Multi-sig Wallets?

Suppose you hold significant amounts of cryptocurrency in a traditional single-sig wallet. In that case, you might want to consider a multi-sig wallet. However, the set-up, learning curve, and coordination required for a multi-sig wallet are considerable. Considering the ease of signing up for and using a standard crypto wallet, the multi-sig option might not be worth it to most people. 

That said, a multi-sig wallet is an excellent option for beefing up security if the circumstances demand it. However, not all cryptocurrencies support multi-sig wallets, so act accordingly.

Collaborative Opportunities in Multi-Signature Wallet Development

The rising popularity of multi-sig wallets has also spurred collaborative efforts within the cryptocurrency community. Developers, security experts, and blockchain enthusiasts are working together to create more user-friendly interfaces and advanced features for multi-sig wallets. This includes innovations like integrating multi-sig functionality into decentralized applications (dApps) and exploring its use in cross-chain transactions. These collaborative advancements aim to make multi-sig wallets more accessible while maintaining robust security standards, ensuring their growing adoption across industries.

Disclaimer

This article is for informational purposes only and does not constitute financial, investment, or technical advice. Always consult a qualified professional when making decisions related to cryptocurrency security or wallet setups. The views expressed herein include collaborative input and do not necessarily reflect the opinions of Quantify Crypto.