How Do Multisig Wallets Keep Your Digital Assets Safe?
Main Takeaways:
Unlike conventional crypto wallets, multi-signature (multisig) wallets require more than one private key to authorize a transaction.
When used properly, multisig wallets can enhance the security of your funds and mitigate the risk of theft, and loss.
With the increasing institutional adoption of digital assets, financial institutions need a secure way to store their funds. When used properly, multi-signature (multisig) wallets offer digital asset holders a way to safeguard their funds with an additional layer of security. Although multisig technology existed long before cryptocurrency, it’s most often associated with Bitcoin. Multisig technology was first applied to Bitcoin addresses in 2012, which led to the widespread adoption of multisig wallets a year later.
Keep on reading to learn more about how multisig wallets work, their advantages and disadvantages, and more.
What Is A Multisig Wallet?
Conventional crypto wallets use one private key to provide access to funds with no further authorization required. In contrast, a multisig wallet uses a special digital signature that requires more than one private key to authorize a transaction. In some cases, several different keys are needed to generate a signature. And depending on the configuration of your multisig wallet, it may require a different combination of keys. 2-of-3 is the most common one, where only two signatures are needed to access a three-signature wallet. However, there are many other combinations, from 2-of-2, 3-of-4 to 4-of-6.
How Do Multisig Wallets Work?
A classic example used to explain the concept of multisig wallets is a bank vault that requires two or more keys to open. Let’s imagine there is a bank vault with two locks and two keys. A bank employee holds one key, and you hold the other. To open the safe, both of you need to use your keys at the same time. In this analogy, one wouldn’t be able to open the safe without the other.
Similarly, you can only move funds stored in a multisig wallet if two or more signatures sign off on the transfer. This additional layer of security may help crypto holders prevent loss and theft. More importantly, regardless of the signatures needed, a multisig wallet is engineered to mitigate the possibility of a single point of failure.
What Are The Advantages of Multisig wallets?
Increased security
Multisig wallets offer crypto holders better security than single signature alternatives. Even if one of the keys is lost or stolen, your funds are still safe.
Escrow transactions
A 2-of-3 multisig wallet allows a third party to participate in escrow transactions between two parties. In this case, the third party acts as a mutually trusted mediator if anything goes wrong.
Controlled Access to funds
The multisig requirement adds another layer of security to wallet transactions by ensuring that multiple key holders remain accountable to one another. For example, if a company sets up a 6-of-8 wallet, no one can unilaterally withdraw and misuse the funds. The more signatures needed to authorize a transaction, the more distributed the decision-making process.
What Are The Disadvantages Of Multisig Wallets?
Transaction speed
Multi-signature wallets are often slower than conventional crypto wallets as they rely on another signature and device to execute a transaction. While this might not be a big issue for infrequent use, making regular transactions with a multisig wallet can be inconvenient.
Recovery process
A multisig wallet's recovery process may be slower than a conventional crypto wallet because you have to import each recovery phrase associated with it (one for each owner).
Technical expertise
Setting up a multisig wallet requires a certain level of technical knowledge and might be hard to navigate for less technically savvy users.
How Ceffu Safeguards Your Funds
From a security perspective, it’s crucial to safeguard your digital assets in ways that eliminate risks associated with a single vulnerable point that can compromise your funds. While multisig is considered a secure system requiring multiple independent keys to unlock a vault, there are also obstacles that it cannot overcome. Multisig requires generating a larger private key for the multiple locks on the vault. This is not ideal because participants will leave traces showing who signed, and multiple parties must be online simultaneously.
However, the distributed nature of multi-party computation (MPC) is more flexible compared to multisig. MPC eliminates the concept of using a single private key, meaning a key is never gathered on a single device at any point. Even if a subset of keys is available, you can still unlock the vault.
To eliminate centralized risks, Ceffu uses multilayer technology and MPC cryptography to manage our users' funds in a more secure way.
If you wish to learn more about how Ceffu can help protect and manage your company’s crypto assets, fill out the contact form on our website, and we will contact you shortly.
Conclusion
Although multisig wallets have their limitations, they offer multiple advantages especially for institutional digital asset investors. By requiring more than one signature to execute transactions, multisig wallets are created to strengthen security, eliminate single source failure and enable escrow transactions. Especially when it comes to large sums of crypto assets.
About Ceffu
Ceffu is a compliant, institutional-grade custody platform offering custody and liquidity solutions. Its multi-party computation (MPC) technology, combined with a customizable multi-approval scheme, provides bespoke solutions allowing institutional clients to safely store and manage their digital assets through its insured, segregated cold storage solution, Qualified Wallet. Institutions also benefit from Ceffu’s secure gateway to a wide range of liquidity products within the Binance ecosystem as Binance’s institutional custody partner.
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