Multi-Sig: How Multi-Signature Cryptocurrency Wallets’ Security Works for You
There are certain problems when it comes to cryptocurrency. The biggest is keeping a wallet secure from hackers. This is a problem if you go far too paranoid and end up losing the key for your wallet. You could have put it on a hard drive and lost it/broke it. One man had Bitcoin on an old laptop, which was sold for spare parts.
He kept the hard drive but threw it away by mistake when he was moving. When he realized his mistake, he tried to look for it but had no luck.
This is a nightmare scenario. A loss of $127 million can hit hard, but lower amounts are lost every day. Some examples are more recent, and much more disturbing. The death of QuadrigaCX owner and CEO Gerald Cotten was a shock to many people in the industry. When it came out that only he knew the cryptographic key for the company's cryptocurrency, things took a turn for the worse.
This wasn't money that someone had mined when Bitcoin was in its infancy. This was money poured into a crypto exchange by investors. Outside money, that was being curated. Imagine if the CEO of a large bank dies and no one can gain access to the vault. Ever. The lawsuits are ongoing and the results will ripple through the crypto industry for years to come.
These stories are just the highlights of problems that have become common in the digital world. A picture might get lost when your laptop breaks. A report is lost when the lights go out. A common IT mantra has been to ‘always, ALWAYS make sure you have a backup'.
The problem with cryptocurrency is simple. The more backups you have, the greater the chance you can get hacked. Do you have a mobile wallet? A web wallet? A piece of paper? Mobile and web wallets have been broken into before. Paper, or any physical medium, can be stolen. Physical media can also be photographed.
So what does all of this mean for you and what does multisig have to do with it?
First, we need an easy explanation for what multisig is. It is multi-signature cryptocurrency wallet. Wallets are cool, in real life and in crypto. The crypto variety might not be able to hold coin, but it does allow you to pay for stuff, and receive money in turn.
If you want to pay your friend for his old Xbox, you enter in your key into his Bitcoin wallet and you've transferred the money. Easy enough, right? What actually happens is that the Bitcoin has been transferred to another address on the Blockchain.
What multisig does is require multiple authorizations to transfer cryptocurrency between wallets. It can be both on the receiving end and the payment end. Using this feature will require a specific wallet that is configured for multisig payments and receipts.
There are different types of multisig wallets, depending on what a user needs it for.
The first if the so-called M of N method. This where you need M keys to approve a transaction out of a total of N keys that are available. Let' say there is a business with 5 partners.
These 5 partners all have one cryptographic key. Any transaction that the business makes with cryptocurrency would need M keys of the total 5 (N keys). It is usually a two-thirds majority needed, as this is a standard security and trust measure. So, in this case, the transaction would not be fully approved until at least three of the five partners had put their cryptographic keys into the wallet of whomever they were paying. Maybe their supplier of raw goods, maybe their rent.
There is also dual ownership. If a couple marries, and decide to share a cryptocurrency wallet, separate keys can be assigned to them. They would then be able to use the funds in the wallet as they pleased, separately.
Then there is the option that additional cryptographic keys are required or increasing amounts of currency. In this example, there would be a key that could be used to pay for up to $500 worth of goods with cryptocurrency. Any amount over this would then require additional keys depending on the original agreement of the wallet owners (or impulsive single owner who wants to keep themselves in check).
In a nutshell, that is how multisig wallets work – and they are changing how secure money is in the crypto sphere. It's not just about losing one key or about the death of a key figure… it's also about being able to share and knowing that the money will not be misused.