What Are Multisig Wallets In Bitcoin?

Bitcoin multisig keys
2-Of-3 Multi-Signature

In the world of Bitcoin, where the security and storage of your digital asset is paramount, multisig stands out as the most secure method for safeguarding your Bitcoin.

Multisig, short for 'multi-signature,' provides a seamless method for securing your Bitcoin while retaining complete control over your funds. Rather than depending on centralized exchanges to hold your Bitcoin, multisig offers a simple solution that eliminates counterparty risk and mitigates the single points of failure associated with single-signature wallets.

This guide will explore the importance of self-custody and the limitations of single-signature wallets, and it will introduce Bitcoin multisig as the pinnacle of cold storage solutions.


đź”’ Enhance your self-custody with Theya, a collaborative multisig vault.


What 'Self-Custody' Means

Fundamental to Bitcoin's security and long-term storage is the ability to self-custody, personally holding your Bitcoin without needing a bank or exchange intermediary. It is this feature that empowers Bitcoin users beyond any means available in traditional finance. By taking custody of your Bitcoin, you become your own bank. You can transact, save, and transport your Bitcoin with you anywhere and anytime, allowing for unmatched financial autonomy.

Private keys lie at the core of self-custody in Bitcoin. Whoever possesses the private keys to a wallet holds custody over the Bitcoin in that wallet, giving rise to the popular expression "not your keys, not your coins" (NYKNYC).

Many Bitcoin exchanges will hold your private keys for you. But if you fail to withdraw your Bitcoin to your self-custody, where you have full control over the private keys, you're holding a Bitcoin IOU rather than the actual Bitcoin.

Private keys generate addresses for receiving Bitcoin and approve outgoing transactions in a Bitcoin wallet. If you want to learn more about public and private keys in Bitcoin, check out our article here.

When you open a self-custody Bitcoin wallet, the private keys are given to you in the form of 12 words commonly referred to as a 'seed phrase' or 'recovery phrase' and should be kept secret and safe. The loss of your private keys will result in the permanent loss of your Bitcoin, which is why a physical paper wallet and stamped steel backup are always recommended.

The prospect of losing your Bitcoin may seem intimidating, but we explore how Bitcoin multisig alleviates this concern below.

Multisig Wallets vs. Regular Wallets

Before we explore the intricacies of multisig wallets, we must first understand how singlesig wallets operate.

What Is A Singlesig Wallet?

Singlesig wallets are the most widely used form of Bitcoin wallets and often come in the form of a hardware device or software app. While singlesig wallets are a great first step for those entering Bitcoin due to their simplicity, multisig wallets are designed to address some of the drawbacks they present.

A defining feature of singlesig wallets is that they have one private key for transacting and moving the Bitcoin in the wallet. In other words, these types of wallets only require a single signature (from your private key) to transact and move your Bitcoin, hence the name singlesig. While this makes singlesig wallets simpler to set up and move funds within, the existence of only one private key introduces a single point of failure.

Having only one private key for accessing your Bitcoin means that if the private key were to be compromised, your Bitcoin could be at risk. This could happen in a variety of ways, such as theft, loss, or damage to your private keys. In any case, if you lose access to your private keys (think 12-word seed phrase), you lose access to your Bitcoin.

Enter multisig.

Multisig wallets are designed with this risk in mind and offer a clever way to establish an additional layer of protection and alleviate security concerns.

What Is A Multisig Wallet, Exactly?

As the name suggests, multi-signature (multisig) wallets have a signing process that requires signatures from multiple private keys to access, transact, and move the Bitcoin held in self-custody. At any point in time, a subset of the total private keys associated with the wallet (typically 2 out of 3) will be needed to sign a transaction and spend the Bitcoin.

The structure of multisig wallets is most often described using the m-of-n scheme, where 'm' is the required number of private keys needed to sign a transaction and 'n' is the total number of private keys in the multisig setup.

Advantages Of Multisig Wallets

Multi-signature technology stands out as a sophisticated approach to risk mitigation, offering extra peace of mind to Bitcoin users. The level of security provided over traditional wallets is unmatched.

They are a versatile self-custody tool for individuals and excel in scenarios requiring joint control, such as business operations, inheritance planning, or custodial Bitcoin services.

They also bridge the gap between 'hot wallets' and 'cold wallets,' combining the convenience of mobile wallets with the enhanced security typically associated with offline hardware wallets.

Disadvantages of Multisig Wallets

While the obvious benefit of multisig is the enhanced security granted by minimizing the risk of loss or theft of your private keys, everyone should be aware of a few trade-offs. For starters, multisig wallets can be more complex and require a bit more technical knowledge to set up.

Furthermore, due to the presence of multiple private keys, which are ideally distributed across various geographic locations or shared among trusted family and friends, it becomes more cumbersome to transact and move your Bitcoin. However, this is the cost of reducing the risk of theft or loss to your Bitcoin.

Do You Need Multisig?

A multisig setup is ideal for long-term Bitcoin storage where top-tier security is crucial, especially for large Bitcoin holdings comparable to life savings. It's also optimal for scenarios requiring collaborative control with multiple key holders (shared wallet), such as:

  • Inheritance Planning
  • Joint Business Operations
  • Organizational Fund Management

Single-signature wallets are a more user-friendly option for managing smaller amounts of Bitcoin or everyday transactions, providing a good balance of convenience and security for less critical needs.

Theya's 2-of-3 Multisig Wallet

At Theya, we offer a 2-of-3 multi-signature wallet through our streamlined app. This means your Bitcoin wallet would have a total of 3 private keys, and at any point, 2 of these private keys are needed to transact or move the Bitcoin.

Theya holds 1 of these keys, and the other 2 keys would be assigned to two other separate devices. These other devices could be a smartphone or a hardware wallet of your choice.

Additional Wallet Security

To make the setup even more secure, a trusted family member or friend can hold one of the three keys. Additionally, you can geographically separate your private keys, adding further security to your multisig setup.

By separating ownership of the private keys and requiring 2-of-3 private keys to access the Bitcoin, you add an additional layer of security to your Bitcoin wallet. No single key can access your Bitcoin at any point, allowing you to retain sole control over your funds.

Keeping Your Assets Safe

As the wallet owner in a multisig arrangement like Theya's, neither Theya nor any single key holder, such as a family member or friend you entrust a key to, can access your Bitcoin independently.

This distributed control mechanism ensures that access to funds requires consent from multiple key holders, enhancing security against unauthorized use and single points of failure.

Theya's Recovery Process

If you lose the private key you have in your possession, whether by theft, loss, or damage, Theya has your back.

Because you separated ownership of the private keys associated with your wallet, you will still be able to recover your funds thanks to the private key Theya holds and the other key you or a friend still possesses.

2-Of-3 Multsig vs. 3-Of-5

While 2-of-3 multisig is the most popular setup, you can theoretically set up a more complex scheme depending on your security needs and preferences. The following chart from Unchained perfectly visualizes the differences between multisig setups and why 2-of-3 multisig is the ideal choice for most people.

Source: Unchained 'What is Multisig'

Multisig Wallet Takeaways

  • What Is A Multisig (Multi-Signature) Wallet?: A multisig wallet is a method of self-custodying Bitcoin where transactions require authorization from multiple key holders, adding extra layers of security against unauthorized access and theft.
  • Are Multisig Wallets More Secure?: Yes, multisig wallets are generally more secure than single-signature (singlesig) wallets. The key difference lies in how transactions are authorized. In a singlesig wallet, only one private key is required to approve transactions, which can be a vulnerability if this key is compromised. In contrast, multisig wallets need multiple keys to authorize a transaction. This setup creates a robust security layer, preventing unauthorized access by requiring consent from multiple key holders. By demanding multiple keys for access, multisig effectively shields your Bitcoin from external threats and unauthorized use, significantly reducing the security risks associated with private keys.
  • Can Multisig Wallets Be Hacked?: Multisig wallets, by design, are highly resistant to hacking due to the requirement of multiple keys for transaction approvals. The necessity for attackers to compromise a majority of these keys makes unauthorized access virtually impossible. This multi-key safeguard, enhanced by rigorous security measures from each key holder, establishes a near-impenetrable defense, affirming the exceptional security of multisig wallets for asset protection.
  • Is Multi-Signature A Smart Contract?: No, multisig is not a smart contract. It is a security feature for digital wallets that functions like a joint bank account requiring multiple key holders to authorize transactions. Unlike smart contracts, self-executing contracts with terms directly written into code on blockchain platforms, multisig simply means that more than one signature is needed for transactions.

Conclusion

In this guide, we explored Bitcoin multisig, a cold storage solution that keeps you in complete control of your Bitcoin while mitigating the risks associated with singlesig wallets. By requiring multiple keys to access your Bitcoin, multisig provides a shield against external threats such as loss or theft of your private keys.

As you consider the many possibilities of digital wallets and Bitcoin self-custody, remember that while multisig may involve a bit more complexity, it is a battle-tested way to store your Bitcoin securely.

Whether you're an individual or a business, multisig is your key to a safe and secure financial future. Embrace the peace of mind that comes with extra security and take control of your Bitcoin like never before.