The crypto transactions work such that you require a private key to access the wallet and transactions. Only you have the key and its access by another party can compromise its security. However, there is always the concern when you lose the key. Given crypto wallets don’t come with any recovery methods, you lose all your crypto assets when you lose the keys without a backup.
There have also been cases where investors lose their assets when the only person with access to the accounts is unavailable. For example, the QuadrigaCX investors are yet to receive their assets following the death of the founder of the crypto exchange who had sole access to the platform.
That is where multisignature(multisig) crypto wallets come in. They help manage the possibility of these risks.
What is a multisig crypto wallet?
A multisig crypto wallet is a wallet that requires more than one private key to access and transact. These wallets require various cryptographic signatures before you can do anything. It is more like a business bank account that requires multiple signatures of the authorized team members to transact.
How does a multisignature crypto wallet work?
The multisig crypto wallet allows you to set the rules and terms as you wish. For example, you can decide on a 1-of-2 where you have two private key holders to access the account. This operates as a joint account where either of the key holders can transact from the wallet independently. The other option is the 2-of-2 where you have two private keys on different devices and you must use them to transact from the wallet. The 2-of-3 is where you have three parties with access to the wallet but you must have two signatures to authorise the transaction.
The multisig crypto wallet helps secure your assets and backup. For example, with a single private key, anyone who accesses it can transfer funds from your wallet. However, this should not be possible without the authority of the other key holders. It acts as a backup by ensuring that you can still transact even when you lose your private keys. You can let the authorised accounts transact on your behalf.
When is the best way to use a multisig crypto wallet?
Given the top security that comes with multisig wallets, they are most ideal for retail investors to secure Bitcoin, Ethereum or other cryptocurrencies accepted for payments.
The other ideal users for the multisig crypto wallets are the crypto exchanges, investment funds, brokers, and other crypto companies for securing cold-stored funds. The crypto companies hold a lot of funds and are susceptible to hacking. Already, several investors have lost their assets due to hacking of the crypto exchanges. The multisig wallets mean the hacker needs multiple private keys before accessing the stored funds. In most cases, it will be impossible hence more secure.
Should you use a multisig wallet?
There are both proponents and opposers of using the multisig wallet. Some crypto users claim it’s the most secure and fail-proof way to store cryptos, while others claim it is not simplified enough for the basic users.
If you are after security, for the multisig wallet. Already crypto exchanges like Coinbase, BitGo, and Electrum have them for any crypto user.