Multisignature (also known as multi-sig) is a simple technology (by blockchain standards) that solves a couple of pressing problems inherent to Bitcoin and other cryptocurrencies.
With multisignature, two or more parties must approve a transaction before it can be sent. That’s as opposed to a regular Bitcoin transaction where only one person needs to approve the transaction.
Throughout this article, we will primarily use Bitcoin as an example. However, most cryptocurrencies have similar multisignature capabilities.
Signature is a blockchain term referring to the process of approving a transaction. It has nothing to do with physically signing a document.
While single-signature transactions are the most common type of transaction there are a couple of problems with using just one signature.
Blockchains (at least the good ones) cannot be hacked or tricked into sending funds without the proper permissions. That being the case, if you lose the private keys to an account, or otherwise lose access to that account, the funds are locked forever.
In one famous incident half a billion dollars’ worth of crypto was lost when an investor died without leaving behind information about how to access his account. However, if crypto is kept in a multisignature account then there is some chance of recovery.
Here’s a simple example, a Bitcoin wallet that has three signers, any two of which are required to approve a transaction. If the main account holder loses access then his or her two friends can come together to approve a transaction.
Of course, these friends should probably not know each other beforehand lest they come together and divert funds while the person is still using the Bitcoin.
Imagine that you set up a Bitcoin wallet and then (foolishly) decide to store the private keys in a .txt file on your computer. A year later a hacker gains access to your computer, finds the private key to your wallet and uses it to steal all of your Bitcoin.
This can happen, it has happened and it will happen again. However, if each transaction requires just two signatures instead of one the theft could have been averted.
For instance, if a person wants to invest in Bitcoin for the long term they could set up a special multisignature Bitcoin account for their investment portfolio. They could make themselves one of the main signers and their friends the other signer.
Anytime this investor wanted to withdraw Bitcoin from the investment account, he or she would need to also get the friend to approve the transaction. This simple protection would heavily improve security as any hacker would need to steal wallet information from two people instead of one.
Of course, nobody would want to seek their friend’s approval to spend their own money on a regular basis. In this example, an investor might keep their majority holdings (90% of their position) in the multisignature investment account and then they could keep another account with their minority holdings (10%) for trading or daily purchases.
As alluded to, a multisignature account is a great solution for a corporation that is holding Bitcoin or any other cryptocurrency. A corporation can set up an account so that any number of signatures is required. This would make it all but impossible for one individual, or even a small group of individuals, to steal funds.
There is actually a real-world example of this. The Ethereum Foundation, which controls about $100 million worth of Ethereum, keeps its main balance in a multi-sig wallet which requires the approval of several Ethereum Foundation members before a large balance can be withdrawn.
In terms of fraud prevention, one of the blockchain’s unique features is that a record of all transactions is stored forever. Should a group of people make an unauthorized withdrawal from a multisignature wallet it would be impossible for them to remove any traces of the transaction, or hide where the money went.
Most cryptocurrency investors, traders and users will never have a particular need for multisignature and that’s fine. The single most appealing use case for any individual would be account recovery in the event of losing access to a wallet.
However, it’s not as though multisignature is the only solution. It’s much simpler to just write down a wallet’s private key or seed phrase and then store it in several locations like a safe, a bank security box (careful with this one), buried in the backyard, etc.
Still, if you feel that multisignature is interesting and you’d like to experiment with it you can begin by reading this guide on setting up a multisignature Bitcoin wallet. Or, here is a guide on setting up a multisignature Ethereum wallet.