Advantages of Multi-Signature smart contract wallets

Envisage there is an enterprise which consists of different departments and rationally a group of staff among whom some have must have access to treasury which is the capital of the corporation. Naturally, in order to have access to the capital and simultaneously to have control over the money to keep the records some particular individuals are assigned as signers. So, the signers are the ones who can allow money withdrawal and depending on the defined protocol authorization of control is delegated to members of staff. The delegation policy is determined conditionally. Take “n” as the number of signers and logically the policy can be determined to allow withdrawal providing “m” out of “n” sign the permission.

 Regarding this analogy, digital assets can have the same situation. The problem is that as the cryptocurrency is decentralized and there is no authority like a bank or financial institute to hold your money as a saving, the common way to save it is to have a wallet which most popular one is ledger. However, the ledger is a hardware that can’t be shared with others. Now, the question is if the property of an enterprise, is in digital assets such as Bitcoin. If only one person has access to that, what will happen if the person dies or runs away or simply is not available. The most infamous example may be QuadrigaCX, whose customers have been waiting nearly three years to recoup $115 million worth of deposits since the death of founder Gerald Cotten, the sole possessor of the cryptographic keys to the exchange’s wallet. How about the capital of the company which is shared and all share holders would like to have access to their capital. Furthermore, delegating control to owners might need signature which defines the authority of people who want to withdraw some money or conduct a transaction. This is when a need for a smart contract which is featured with multi-signature emerges. Fortunately, multi-signature cryptocurrency wallets offer a built-in way to manage this sort of risk.

Multi-signature wallets (or multisig, for short), are cryptocurrency wallets that require two or more private keys to sign and send a transaction. The storage method requires multiple cryptographic signatures (a private key’s unique fingerprint) to access the wallet.

How does a multi-signature crypto wallet work?

You can choose how many keys are allowed to open the vault as well as the minimum number of keys needed to unlock it (e.g., you could have a 2-of-3 multisig where two out of three assigned private keys are needed, 3-of-5, 5-of-7, etc.).

It works like this: John, Vicky and Chris set up a multi-signature crypto wallet where each holds one key and two of the three keys must be present to send a transaction. To make a payment, Jhon would create a transaction and sign it with his key; he would then send this transaction to Vicky, who would sign it with her key. From here, Vicky can either send it back to Jhon to finalize the transaction or send it to Chris for him to sign, too (though this last step is not necessary, considering only two of the three keys are needed to unlock the wallet).

Typically, hardware wallets (namely, Trezor, Coldcard and Ledger) are the go-to option for using a multisig setup since they are the safest way to store a private key. Once these wallets are combined into a multisig setup, they create an entirely new multi-signature address that is independent of each individual hardware wallet.

When multisig goes wrong

Multisig provides an extra layer of protection for cryptocurrencies holdings, but It’s not the panacea to all problems so it’s not without risks. For Bitcoin, multi-signature wallet software has come a long way since the early days of Electrum (one of the earliest Bitcoin software wallets, which was also one of the first to support multisig), but it’s still a complex process for less technically savvy users. The forthcoming Taproot upgrade, which will enrich Bitcoin’s scripting language to make coding smart contracts easier, will likely improve consumer-grade multisig software. Electrum, despite being kind of a prototype has a weakness that cannot be ignored. Mentioned earlier, Electrum is run on Bitcoin blockchain. The other wallets are mainly applied on Ethereum blockchain.

When would someone use a multi-signature crypto wallet?

For retail investors, multi-signature wallets are commonly used to secure bitcoin, but you can also use them for ethereum and other cryptocurrencies. Most notably, crypto exchanges, brokers/OTCs, investment funds and other crypto companies use multi-signature storage to secure their cold storage funds. Exchanges, brokers and the like distribute admin keys for their funds in order to distribute the risk; if hackers want access to their reserves, they’re going to need several keys to do so. Similarly, multisig ensures no one person in the firm is able to unilaterally withdraw funds from the account. The more signatures you need to execute a transaction, the more distributed the decision-making process can be.

Other specific use cases may involve setting up a shared account among family members (for, e.g., a trust or estate) or an escrow account (for, e.g., a bet or a sale of property). Relatively speaking, multisig is still a niche custody practice among cryptocurrency holders. Still, that doesn’t mean your typical crypto user doesn’t use it to custody their coins.

How do I set up a multi-signature wallet?

Historically, multi-signature wallets have been the domain of developers or hardcore Bitcoiners because they are difficult to set up from scratch. Luckily, today’s tenderfoot multi-signature users have it easier than the trailblazers of previous years. Nowadays, there is a variety of wallet software that streamline the multisig setup process, as well as services that provide customer support and key management services. (For instance, if an unwitting client loses a hardware wallet to the ether, the service has a key as backup.)

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