Understand Multisig Addresses

Multisig addresses (multiple signatures) are a powerful tool in the bitcoin network, increasing security and allowing a more sophisticated level of control over transactions.

Currently, there are various wallets that offer the functionality to create multisig addresses, transforming your wallet into a kind of virtual safe. This security approach is based on the use of multiple padlocks and, consequently, requires more than one key to be opened.

Keep reading this article to understand everything about multisig addresses!

What are multisig addresses?

In Bitcoin, multisig (multi-signature) addresses are wallet addresses that require multiple signatures to authorize a transaction. While a traditional Bitcoin address is associated with a single private key, a multisig address involves multiple private keys.

Multisig refers to addresses that require more than one private key to authorize transactions. In other words, these addresses are constructed in such a way that transactions require multiple signatures, hence the term “multisig.”

Multisig addresses are created using multiple signature scripts (multisig scripts) that define the necessary conditions to spend the funds.

For example, a multisig address can be set up to require two out of three corresponding private keys to sign a transaction. This means that to spend the bitcoins from this address, the consent of at least two authorized parties is necessary.

Thus, they are typically described as “M-of-N” – where M is the minimum number of signatures required and N is the total number of private keys.

So, a 2-of-3 address means there are three private keys, but only two of them are necessary to validate a transaction.

This functionality is useful in situations requiring greater security and control, such as business transactions, shared accounts, or fund custody.

Why use multisig addresses?

There are various reasons to use multisig addresses. Below are some advantages:

Enhanced security

With multisig addresses, an attacker would need to compromise multiple private keys to steal Bitcoin, rather than just one.

Multisigs add layers of security to your wallet because if someone has access to your seed and it is a single signature, that person can steal your balances.

However, if you have a multisig wallet, the person will need to steal more than one signature, making the process much more difficult for the hacker.

Also, understand what Taproot is!

Shared control

The multisig functionality is especially advantageous for businesses and organizations as it allows joint control of funds. For example, a company can set up a 2-of-3 address, where the CEO, CFO, and COO each have a private key.

Thus, to carry out transactions with these funds, at least two of these people would need to agree and sign the transaction.

This approach provides an additional layer of security and risk mitigation. It ensures that no single person has absolute control over the company’s funds, reducing the possibility of mismanagement, internal fraud, or theft.

Additionally, the multisig setup allows a checks and balances system, where multiple parties need to agree before a transaction is authorized.

This flexibility and customization of multisig addresses make them highly suitable for businesses and organizations looking to ensure shared control, transparency, and robust security over their funds.

Learn how to do shared custody of Bitcoin in the Social Multisigs workshop!

Protection against key loss

One of the significant advantages of multisig addresses is additional protection against the loss of private keys.

The loss of a private key on a common address can result in the irreversible loss of funds associated with that address. However, with multisig addresses, even if one of the private keys is lost, it is still possible to access and control the funds.

So if you lose a private key on a 2-of-3 multisig address, you can still access your funds with the remaining two keys.

How do multisig addresses work?

Multisig addresses benefit from a feature of the Bitcoin protocol called transaction scripts. Instead of simply including a Bitcoin address in a transaction, a transaction script can specify more complex rules to determine how funds can be spent.

A multisig address is created by providing N public keys and specifying the minimum number of signatures (M) needed to spend the funds. This “script” is then encoded into a Bitcoin address, which can be shared and used like any other Bitcoin address.

Therefore, to spend funds from a multisig address, the holders must create a transaction and sign it with their private keys. Thus, if the transaction has enough signatures (i.e., meets the M requirement), it will be considered valid by the bitcoin network and the funds will be transferred.

That is, when a transaction is requested, a minimum number of signatures need to occur for the operation to be inserted into the blockchain.

Multisig wallets can be 2 of 2, 2 of 3, 3 of 5, etc.

Moreover, the minimum number of signatures required to move the balance is chosen during the wallet setup.

Where to set up?

Today, several wallets offer the functionality to create multisig addresses.

However, a recommended option to experiment with and understand how it works is the Blue Wallet. For more advanced users, the Sparrow wallet is a more sophisticated choice.

Both wallets allow you to use your hardware wallet to create multisig addresses in conjunction with the mentioned hot wallets.

In addition, there are currently companies that offer shared multisig services, such as Casa and Unchained Capital.

With this type of setup, it is possible to create a 2-of-3 multisig, where one of the keys is held by one of these companies.

It is important to note that the company does not have access to your balance without the combination of your keys. This means that even if you are robbed and have your keys stolen, the robber will not be able to steal your funds, as they will not have the company’s key.

Conclusion

Although it is an additional step in understanding wallets, multisig addresses offer increased security in custody of your bitcoin, whether you are an individual looking to better protect your funds or a company looking to share control of bitcoin balances in a safe and reliable way.

The main point, just like with single-signature wallets, is to take good care of your words and keep them securely.

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