If the recent upheaval in the cryptocurrency space has convinced you to buy Bitcoin, there’s no other option worth exploring than to set up an account with an exchange. You can use ordinary fiat money to buy Bitcoin online on a cryptocurrency exchange like Binance, or trade Bitcoin for another cryptocurrency. To take part in the Web 3.0 economy, you need a wallet. Besides storing the public and/or private keys, the cryptocurrency wallet offers the functionality of signing information. More precisely, it provides digital signatures that authorize each transaction. Traditional Bitcoin wallets rely on a single signature key, so they’re risky, to say the least. If you want to make Bitcoin more secure, use a multi-signature wallet.
What Is a Multi-Signature Wallet and How Does It Work?
As the name suggests, a multi-signature wallet is a wallet that requires multiple unique signatures to authorize and execute transactions. To access the funds, you need more than one private key, which can be helpful in several situations. It goes without saying that if one of the signatures is missing, the transaction won’t go through. As with all self-custody wallets, the seed phrase can’t be recovered, so carefully plan your backup. You can share your Bitcoin wallet without any problem (without putting your cryptocurrency holdings at risk), but you need a minimum of two participants.
Only the keys mentioned by the address can be used. E.g., yours, your spouse’s, etc. If one of the keys is compromised, your digital assets remain secure. Depending on the type of wallet, the number of signatures required to authorize and execute a transaction is lower or equal to the number of co-payers of the wallet. When you create a transaction request, a notification is automatically sent to all wallet participants, which they can approve or reject. Using a multi-signature Bitcoin wallet adds an extra layer of security to your funds. The multi-signature technology is capable of deterring malware infections and phishing attacks.
Types Of Multi-Signature Cryptocurrency Wallets
We categorize multi-signature wallets as follows:
- 2-of-2 multi-signature wallets. Two people share the wallet, and two signatures are required to complete the transaction. You can keep one private key on a computer and the other on a mobile device. There’s the risk of losing access to the cryptocurrency holdings if one of the devices is compromised.
- 1-of-2 multi-signature wallets. You can share the funds with a trusted party by setting up a Bitcoin wallet that enables any private keys to generate the signature. Both keys aren’t necessary.
- 2-of-3 multi-signature wallets. There are three keys in total, with two keys required to spend the money. Losing access to one key and its backup doesn’t permanently lock you out of your Bitcoin.
Remember that every time you want to sign a transaction, the necessary number of co-payers must sign it, and to recover the wallet, you need several seed phrases.
Multi-Signature Isn’t Native to Bitcoin
A transaction requiring two or more signatures to be executed isn’t a new idea. Multi-signature accounts are a common phenomenon in traditional banking. For example, two spouses can share a bank account. As far as commercial banking is concerned, businesses, NGOs, and other organizations require consent from several individuals, so there’s a legal obligation for multiple signatures. Getting back on topic, security is enhanced when the keys are stored in several locations and aren’t controlled by a single entity. While you can sort out your security, you might find it easier to trade through a reputable exchange like Binance.
So, Should You Use a Multi-Signature Bitcoin Wallet?
Of course, the decision is up to you, but a multi-signature wallet is better than a single-signature setup, as it provides better protection. It’s hard, if not impossible, for hackers to get hold of all the keys to withdraw Bitcoin from your account. Since you don’t rely on a single device, you reduce the probability of losing access to your funds. Each co-payer has a different, one-of-a-kind signature required to move the funds. However, duplicating the same co-payer wallet on multiple devices isn’t beneficial because they provide the same signature. Attention must be paid to the fact that using a multi-signature Bitcoin wallet is costlier because the scripting is different, and more signatures are included in the transaction.
There’s no denying that a multi-signature wallet is an improved solution to security issues, but there are limitations to be aware of. To set up a multi-signature Bitcoin wallet, you need technical know-how, but you’ll be happy to know that some providers have made this less of an issue in recent years. The transaction speed is low because the wallet provider implements multiple codes for each on-chain multi-signature solution, so this might be an issue if you regularly transact with the Bitcoin wallet. Lastly, multi-signature wallets tend to be non-custodial, meaning that you can’t seek legal recourse if something goes wrong.
You can use a multi-signature Bitcoin wallet with hardware devices from different manufacturers – do it in any combination that works best for you. There’s no hierarchy when it comes to the private keys, so only the number required to authorize and execute the transactions matters; the transaction will remain pending until all the required keys are provided. It’s necessary to teach your friends or family the process for using multi-signatures, so leave detailed instructions. The Lightning Network is used for multi-signature wallets because it’s more secure. As we can all remember, the Lightning Network is a layer-2 solution built on top of Bitcoin, created in response to scalability issues.
Large amounts of Bitcoin can tempt anyone, so you’ll want to decrease the risk of unauthorized transactions by having co-payers approve every transaction. If you run a decentralized autonomous organization, having a second person signing off on the transactions is crucial so as not to undercut the group’s objective. Needless to say, you can’t have everyone signing because nothing will hardly get done. At the end of the day, all that matters is that your Bitcoin is safe. Only time will tell if using a multi-signature wallet is a good idea.