A multi-signature wallet is a type of cryptocurrency wallet that is typically used to authorize an outgoing transaction by more than one person. The utility of these wallets becomes apparent when digital assets belong to multiple individuals or are held by a company. Using this technology requires more technical knowledge, and in this article, we have compiled the importance, applications, advantages, disadvantages, and how to create and use it.
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Before anything else, it is best to first understand the concepts and importance of the seed phrase and private key so that we can better comprehend and use multi-signature (Multi-Sig) technology.
Seed Phrase:
A seed phrase is a set of randomly generated words (usually 12 to 24 words) used to create and recover digital wallets. This phrase acts as the master key for accessing digital assets. It is used to recover a wallet in case of device loss or damage. By entering this phrase, one can access all the assets associated with the wallet.
Private Key:
A private key consists of a unique string of numbers and letters that is directly used to sign transactions and access the assets stored in a wallet—it is essentially the password for each wallet. Every private key is linked to a specific address on the blockchain. The private key is used for signing transactions and transferring assets. If someone gains access to your private key, they can access and transfer your assets.
Therefore, the private key and seed phrase must always be kept out of reach of others, as gaining access to these keys means gaining access to your assets.
Now that we understand the concept of the private key, let’s define the multi-signature wallet.
What is Multi-Signature Wallet Technology?
As mentioned earlier, a multi-signature wallet is a type of digital wallet that requires more than one private key to approve and execute transactions.
Multi-signature capability is a digital signature scheme in a multi-signature wallet that allows a group of users (more than one user) to confirm a transaction in blockchain networks, requiring all or a certain number of partners to approve the transaction before execution.
Multi-signature technology is primarily used to enhance security in cryptocurrency transactions and is somewhat similar to the mechanism of smart contract technology.
Standard transactions on networks like Bitcoin (BTC) can be considered single-signature transactions because, traditionally, they require only one signature (or private key), which is controlled by the asset holder. However, Bitcoin also supports much more complex transactions that require multiple parties to sign before the funds can be transferred. These transactions are commonly referred to as M-of-N transactions.
The general idea of multi-signature transactions is that multiple parties must provide their addresses for a transaction to be executed, ensuring that collaboration is required before assets can be accessed. These addresses can belong to individuals, organizations, or pre-programmed scripts (Scripts). A multi-signature transaction requires multiple private keys, meaning that participants must reach a consensus before releasing funds, adding an extra layer of security.
Advantages and Applications of Multi-Signature Transactions
Due to their unique features, multi-signature transactions offer numerous benefits, which we will examine in detail:
Enhanced Security and Theft Protection
Since multiple signatures are required to approve a transaction, even if one private key is compromised, the assets remain secure. This feature is especially critical for large wallets and organizations.
Reducing the Risk of Human Error
If a person accidentally or intentionally tries to make an unauthorized transaction, the requirement for additional approvals prevents it from being executed.
Shared Control and Group Management
Multi-signature transactions enable shared control over funds. For example, in a company, different managers can jointly oversee the budget.
Distributed Responsibility
Because multiple people must collaborate to approve transactions, financial responsibility is evenly distributed, ensuring that no one can make significant financial decisions alone.
Documented Review Process
The presence of multiple signatures acts as a documented review process, which can serve as evidence in case of disputes or issues.
Transparency and Increased Trust
In groups or organizations, the requirement for multiple signatures fosters trust among members, as everyone knows that financial decisions cannot be made unilaterally and all processes require prior consultation.
Flexibility in Design
Users can set the required number of signatures according to their specific needs. For instance, a wallet can be configured to require two out of three possible signatures.
Support for Various Use Cases
This system can be used in a variety of applications, including business transactions, joint investments, and most importantly, smart contracts.
Suitable for Managing Large Projects
For large projects involving multiple stakeholders, multi-signature transactions help manage financial resources better and ensure that all stakeholders participate in decision-making.
Effective Ways to Protect Private Keys in Multi-Signature Transactions
Using External Devices to Store Private Keys
Some hardware wallets, such as Ledger Nano and Trezor, offer the ability to store private keys offline, ensuring an extra layer of security.
How Multi-Signature Wallets Work
A multi-signature wallet, also known as a multi-signature vault or multi-signature safe, is a digital application designed for securely storing cryptocurrency assets like Bitcoin. To access the stored digital assets in the wallet and conduct any transaction, multiple signatures (private keys) are required. A multi-signature wallet is similar to a bank safe deposit box, which requires multiple keys to be opened simultaneously.
As a result, when predefined conditions are met (i.e., all required signatures are provided), transactions are executed automatically without the need for any third-party intermediary.
The self-custody aspect of this technology allows cryptocurrency holders to manage their assets in a mechanized and secure manner.
Important Security Recommendations
Always back up your private keys and avoid storing them online. Do not use cloud storage or internet-connected computers for this purpose.
Keep in mind that securing your private keys is not the same as securing your digital assets. Digital assets exist on the blockchain, not inside your wallet. Therefore, whether your wallet is hardware-based or software-based is irrelevant—the security of your 12-word seed phrase or private key is what truly matters.
How to Use a Trusted Multi-Signature Wallet – Safe
To use this platform, you will need more than one wallet. To create multiple wallets with unique private keys, you can use iSafePal. Once you have created these wallets, transfer them from SafePal to multiple different devices.
After transferring, make sure to write down the 12-word seed phrase of each wallet in a secure location.
After entering Safe, connect one of the wallets and click on “Create new Safe Account,” then choose a name for your wallet.
Next, select the required blockchains where your assets are located and enter the wallet addresses in order with your desired names.
Then, in the “Threshold” section, set the minimum number of signatures required to confirm a transaction. For example, if you choose the number 3, it means that if 3 out of 4 available wallets sign, the requested transaction will be executed.
Finally, click on the “Active now” option to activate the contract.
Now, the multi-signature wallet is ready and visible on the blockchain. To use it, simply click on the “Receive” option and transfer your assets to it.
Note: For any changes in the defined settings, such as withdrawals or changing the number of signatures, all signatures must be registered; otherwise, the changes will not be applied.
An interesting point is that a feature has been added to the Safe platform, allowing users to perform one free transaction daily without paying the Gas Fee, the fee required for processing blockchain transactions.
The use and importance of this feature lie in the fact that if an issue arises with one of the wallets or if, for any reason, you cannot deposit the network transfer fee into that wallet, by connecting it to Safe, you can move your assets using Safe’s feature.
