​​Multisig Wallets Explained

June 9, 2023

​​Multisig Wallets Explained

Welcome to the exciting world of cryptocurrency, where digital assets have revolutionized investments and transactions. As cryptocurrencies continue to expand, it becomes increasingly vital to recognize the significance of safeguarding digital assets. The implementation of stringent security protocols is more crucial than it has ever been before!

This article aims to delve into the topic of multi-sig wallets and how these wallets can provide a heightened level of security and offer users some peace of mind. Regardless of the level of expertise of the investors, whether beginners or experienced enthusiasts, understanding multi-sig wallets is essential to safeguarding digital assets.

So, what are multi-sig wallets? Multisig, short for "multi-signature," is a cutting-edge technology that allows for increased security in managing cryptocurrency funds. Traditional wallets typically require a single private key to access and authorize transactions. In contrast, multi-sig wallets require multiple private keys, usually from different individuals or devices, to authorize transactions. This added layer of security significantly reduces the risk of unauthorized access and provides greater control over digital assets.

Despite the numerous advantages it offers, many investors have yet to embrace the concept of multi-sig wallets. Often, this is simply because they are unfamiliar with the concept. In this comprehensive guide, we will demystify multi-sig wallets, empowering you to safeguard your crypto with confidence.

What is a Multisig Wallet?

Multisig wallets are a special type of wallet for securely storing cryptocurrencies where two or more signatures are required to access digital assets. Hence, the term "multi-signature" wallets. To better understand what this is, let's compare it to a secure deposit box with multiple keys. This safety box will be a digital equivalent of a multi-sig wallet. Just like the physical box, the multi-sig wallets can only be accessed when several keys are inserted into various locks. In the digital realm, multi-sig wallets act like a virtual deposit box, holding funds securely, where transactions can only be authorized if multiple users provide their signatures or keys.

Since their emergence in 2013, multisig wallets have evolved significantly and now come in various forms. During the wallet setup, users have the flexibility to determine the number of participants required to open the wallet and the number of private keys made available. One of the most popular configurations for a multi-sig wallet is the "2-of-3" multi-sig, which requires three unique signatures and any two out of the three to authenticate a transaction. Of course, there are any number of configurations you can choose from. Let's delve into a few of them:

Types of Multi-Sig Wallets 

  1. 1-of-2 signatures: Here, two private keys are associated with a single wallet. Transactions are approved with just one key. The 1-of-2 setup is useful for small businesses where two founders can transfer funds, relying on the trust established through contracts and personal relationships. It also acts as a personal backup, allowing users to recover funds even if one key is lost.
  2. 2-of-3 signatures: With this type of multi-sig wallet, two out of three registered signers are required to complete a transaction. It's commonly used for escrow transactions and provides extra security for cryptocurrency custodians. The company holds two keys, one stored securely offline and the other kept online for easier signing. If the custodian loses a key, they can always reach out to the trusted blockchain security company that holds the third key.
  3. 3-of-5 signatures: This is a stronger setup that requires three out of five signatures to validate transactions. The 3-of-5 setup benefits corporate structures where multiple decision-makers must approve transfers. As long as more than 50% of the parties agree, they can authorize fund transfers. Signatures are often delegated to entities in different locations to enhance security.
  4. Hosted vs. Unhosted: A hosted multi-sig wallet is created through platforms like BitGo or Coinbase Custody. These platforms offer institutional-grade security allowing clients to register approved signatories and set signature thresholds to transfer funds. On the other hand, an unhosted multi-sig wallet, also referred to as a self-hosted wallet, involves individuals or organizations holding their private keys and not a third party. Setting up this type of wallet requires more complex security measures and infrastructure but provides convenience and eliminates risks associated with third-party involvement.

Therefore, multi-sig wallets are like "programmable wallets" that rely on smart contracts. These smart contracts define the rules for approving transactions, including the number of required signatures and the authorized signatories. In summary, a multi-sig wallet is a smart contract on a blockchain that handles signatures, addresses, and other rules.

Once a transaction is initiated, details are shared with the signatories, who will approve using their private keys. The smart contract then checks if the required number of signatures has been obtained. If enough signatures are present, the transaction is deemed valid and can be executed on the blockchain. If not, the transaction remains pending until all the necessary approvals are obtained. These key features make multisig wallets a much better option than traditional single-key wallets.

Uses of Multisig Wallets

A multi-sig wallet serves various purposes and finds application in numerous cases. Here are five real-world examples highlighting the versatility of multisig wallets:

  1. Cryptocurrency Transfers: Many cryptocurrency exchanges employ multisig wallets to enhance security and protect customer funds. As multiple signatures are required for transaction approvals, it reduces the risk of unauthorized access to or theft of digital assets.
  2. Non-profit Organizations and Donations: As non-profit organizations often handle substantial amounts of funds and donations, multisig wallets can be enabled for transparent fund transfers. This requires multiple board members to sign off on transactions ensuring that funds are utilized appropriately, minimizing the risk of misuse.
  3. Estate Planning and Inheritance: Multisig wallets offer practical solutions for estate planning and inheritance purposes. By setting up a simple multi-sig wallet with trusted family members, lawyers, or executors as signatories, individuals can ensure that their digital assets are transferred to designated beneficiaries upon their passing. 
  4. Corporate Finances: Multisig wallets are beneficial for managing corporate finances. In scenarios where multiple decision-makers or executives are involved, a multisig setup can be implemented to require a specific number of signatures for fund transfers. This helps prevent unauthorized transactions and provides a transparent approval process within the organization.
  5. Joint Business Ventures: Multisig wallets are valuable for partnerships or joint ventures as they enable a secure framework for managing shared finances. It also prevents any unilateral actions that adversely affect the venture.

Pros and Cons of Multisig Wallets

When it comes to managing digital assets, making informed decisions is crucial. Like any other purchase, it is essential to weigh the advantages and disadvantages of multi-sig wallets. Before incorporating them into your digital asset storage and management strategy, take the time to assess their suitability based on your specific needs and circumstances. This section explores the pros and cons of multisig wallets to help you make an informed decision.

Pros of Multisig Wallets:

Multisig wallets offer several advantages over traditional single-signature wallets. Let's explore these advantages in detail:

Enhanced Security

One of the primary benefits of multisig wallets is increased security. By requiring multiple signatures to sign off any transaction, multisig wallets reduce the risk of unauthorized access and mitigate the impact of private key compromise. In single-signature wallets, a single key is all that is needed to execute a transaction. However, in multisig wallets, attackers have to gain access to multiple private keys to compromise the funds. This added layer of security makes multisig wallets an attractive option for individuals and organizations seeking robust protection for their digital assets.

Shared Control 

Multisig wallets allow for shared control over funds and transactions. This is particularly advantageous for businesses, families, or organizations where decisions and transactions require the consensus of multiple stakeholders. For example, in a business setting, a multi-sig wallet can be configured to gain the approval of multiple executives or board members before funds are transferred. This shared control helps prevent unauthorized or even impulsive transactions.

Protection against Key Loss 

Losing access to a private key can be a disastrous event for cryptocurrency holders. However, multisig wallets provide a safeguard against this risk. Depending on the setup (such as 2-of-3 or 3-of-5), multisig wallets allow users to transact and access their funds even if they lose one of the authorized keys. For instance, in a 2-of-3 setup, users can still execute transactions and manage their funds with the remaining two keys. This feature provides peace of mind and reduces the chances of permanent loss due to key misplacement or accidental deletion.

 Escrow and Dispute Resolution 

Multisig wallets are commonly used in escrow services and facilitate secure transactions between parties who do not fully trust each other. In such scenarios, a multi-sig wallet acts as a neutral intermediary, holding the funds until the agreed-upon conditions are met. For example, a 2-of-3 multisig can be utilized, where a buyer could deposit the funds into the wallet, promising to release them to the seller as soon as the goods are delivered. The seller will also hold a key with the third party who acts as a final signatory to this multi-sig contract. The multi-sig setup ensures that neither party can access the funds unilaterally, promoting transparency and fairness.

 Flexibility in Signature Configuration

Multisig wallets offer flexibility in setting up the required number of signatures for transaction approval. For example, a 2-of-2 setup might be suitable for a couple managing shared funds, while a 3-of-5 setup might be preferred for a larger organization with multiple stakeholder involvement.


Cons of Multisig Wallets:


While Multisig wallets undeniably offer numerous benefits, it is important to acknowledge that they are not without drawbacks. Let us delve into some of the disadvantages associated with Multisig wallets.


Setting up and managing multisig wallets can be more complex than single-signature wallets. The involvement of multiple keys, signatories, and rules requires careful planning and coordination among all parties involved. The configuration of multisig addresses is known to be challenging, and without the technical knowledge and right skills, one might not be able to find their way around it.

Higher Transaction Costs

Because multi-sig requires each party to sign the transaction independently this means that each signer must pay network fees to approve the transaction. On top of this, some multi-sig wallets like Gnosis Safe are smart contract wallets which increases the complexity of the transaction being authorised and therefore can require a higher network fee to process the transaction. In the case of Gnosis Safe this can be as much as 3 or 4 times higher than the network fee you’d pay when using a standard hot wallet.

Slow Transaction Speed

Given that multiple parties must sign off on transactions, it can extend the duration of a transaction. If there is effective communication and coordination among all key holders, the time impact is not significant. However, difficulties tend to arise when it becomes challenging to reach other members. In such cases, transactions that take seconds to complete may take several days.

Tedious Recovery Processes

Above all, the recovery process for multisig wallets is notably tedious and complex as it requires importing the recovery phases into separate devices.


Top Multisig Wallets 

Before diving into this topic, please be advised that not all multisig wallets offer the same features and functionality. Among crypto investors, several popular options have gained recognition. Here are a few examples:

1. Gnosis Safe:

Gnosis Safe (now known as “Safe”) is one of the most popular multisig wallets in DeFi. It’s a smart contract based multi-sig wallet that reportedly holds upwards of $60B as of 2023. The smart contract runs on its own network, making it favorable to DeFi maxis.

2. Armory:

Armory is a widely used multisig wallet specifically designed for Bitcoin (BTC). It stands out due to its versatility, offering various wallet styles and built-in protection against certain hacking attempts. Armory also provides an offline mode, allowing users to store their private keys on USB devices for added security. However, certain functions may come with transaction fees.

3. Electrum:

Electrum is one of the oldest multisig wallets available for Bitcoin. This wallet offers a convenient and secure interface for users. It also integrates well with other wallets like Ledger and Trezor. Electrum is particularly favored for its user-friendly experience and support for simplified payment verification. However, it's worth noting that Electrum is primarily focused on Bitcoin and may not support other cryptocurrencies.

4. Carbon Wallet:

Unlike Electrum, Carbon Wallet is a multicurrency wallet supporting various currencies. Unlike many other wallets, Carbon Wallet allows users to add a diverse range of top cryptos to their wallets. This versatility makes Carbon Wallet particularly well-suited for businesses engaged in handling a lot of smart contracts. It is important to be aware, though, that Carbon Wallet is classified as a hot wallet, meaning it remains connected to the internet at all times. This connectivity exposes it to a slightly higher vulnerability to online attacks.


The Future of Multisig Wallets: MPC

Despite its popularity, multisig wallets actually have a number of limitations and vulnerabilities which I’ve mentioned above. As a result savvier users have begun to seek alternatives to the traditional multisig wallet and one clear winner is emerging - Multiparty Computation (MPC).

MPC-based wallets offer the advantages of multisig wallets without the limitations and with a much greater degree of security. With MPC wallets users can still set multi-party approvals for wallets, only instead of each signer signing the transaction with their own private key, the signer uses a key shard. The key shards are never combined, meaning there’s no risk of an entire private key being exposed to hackers. Instead, MPC uses something called threshold cryptography to determine whether the majority of parties have approved a transaction. When consensus is reached a single signature is sent to the blockchain. The added benefit of this is that it preserves the anonymity of the parties involved in the signing process, including how many are required.

Overall MPC is significantly more secure than traditional multisig wallets. It’s also much more flexible and cost effective. As a result, most enterprises have chosen to adopt MPC-based wallets over multisig or cold storage solutions.

It’s also why we at Krayon chose to build our wallet using MPC technology! Krayon offers MPC-based wallets to teams, startups and SMEs. You can sign up and try it for free on our website.

You can read more about the advantages of MPC versus Multisig here.

Recent posts