What Is Multisig (and Why You Absolutely Need It)
It’s every Bitcoin user’s nightmare. You try to be careful and cautious with your Bitcoin wallet, but then you lose everything. It could be the result of a hacked device or a phishing attack. Or a corrupt hard drive, a lost phone, or a misplaced printout. Either way, you’ve lost access to your wallet and all your hard earned Bitcoin along with it.
Luckily, this problem can be avoided with Multisig. And by the time you’re finished reading this article, you will know everything you need to know about it.
The Problems of Single Signature (Singlesig) Authentication
Your Bitcoin wallet is essentially just an address to which all your Bitcoin is assigned. To be able to use the funds on a Bitcoin address you need to know two things. The first is its public address. The second is the private key that gives you access to the funds on that address.
The public address is akin to a bank account number. It’s called a “public” address, because you can share it with anyone. If you want someone to send you Bitcoin to your wallet, you need to give them its public address.
On the other hand, your private key is akin to a password. It's something you want to keep a secret, because its gives anyone possessing it full access to your funds. Unlike a conventional password, you don’t create your public key. It’s instead generated using advanced cryptography. You also don't keep it in your head, but instead store it on a computer, a smartphone, or a hardware wallet. Lastly, unlike a password, your private key is inseparably tied to your address. So there is no way for you to change it in case it gets compromised or recover it if it is lost.
So when you lose your private key, you lose all the Bitcoin in your wallet without any chance of recovery. Likewise, if a hacker or a phisher were to get a hold of your private key, they’d have full reign of your Bitcoin wallet.
Multisig I: Personal Security
This is where the simple, yet elegant solution called Multisig comes in. A Multisig address also consists of a single public address, but it has several private keys instead of one. When you create it, you choose the amount of private keys you want to generate. You also choose the number of keys needed to authenticate a transaction.
When creating a Multisig address, most people elect to use a simple 2/3 setup. This means that the address has a total of 3 private keys and that 2 of those 3 keys are needed to validate a transaction. Key one is your main key, which you can keep on your phone or other device. The second key you will usually give to an authenticator service (many of these work similarly to Google Authenticator). The third key is your backup key. This one is best kept in a safe place, such as a safety deposit box.
In this setup, to make a transaction, two of the three keys are needed. This solution is as brilliant as it is simple. It solves the vast majority of problem scenarios with private keys:
- If a hacker gets a hold of your main key, they won’t be able to steal your Bitcoin because they don’t have the authenticator’s key.
- If you lose your main key, you will still have access to your funds via your backup key and the authenticator service.
- And in the unlikely scenario your authenticator service gets hacked, there’s still no need to worry. Having only one key, the hackers won’t be able to make any transactions. And you will still have your main private key and your backup, so you will be able to transfer your Bitcoin to a new address in a safe manner.
Multisig II: Jointly-Owned Wallets
In addition to private use, Multisig is also great for jointly-owned wallets. In a joint-user setup, each user is given a private key. During the creation of the address, the group agrees on the rules of how many key holders need to sign off on a transaction to authenticate it. This allows many people to own an address while eliminating the risk of the money being used without the consent of other key holders.
Multisig addresses can be set up to require the consent of all of the key holders or a certain percentage of them.
An all-consent setup is good for such uses as the joint address of a family. Before a transaction can go through, both spouses need to agree on it. This way, neither partner can make an important purchasing decision without the approval of the second one.
The second scenario allows for the creation of an in-built voting system. This is great for business and joint investment use. For example, there could be 9 key holders, and the majority of 5 keys could be needed to authenticate a transaction.
3 Recommended Bitcoin Wallets with Multisig Support:
There are many ways of setting up a Multisig address. As a starting point, our experts recommend trying out the following three Bitcoin clients with Multisig features:
- Bitcoin Armory
- Carbon Wallet
Ready to setup your first Multisig wallet? We've got you covered! Check out the dedicated article in our FAQ on How to Setup a Multisig Wallet and create yours today!