All of the previous schemes have relied on a single private key to control the wallet. This presents an all-or-nothing risk for loss of funds from both theft and negligence. To counter this, a wallet can have several private keys attached of which all or a subset need to sign any transactions.
This is often called multi-signature, or multisig for short, but is also sometimes referred to as a vault. A multi-key setup is described as n-of-n to indicate how many keys are needed to sign a transaction out of the issued number. For example, a 2-of-3 setup requires two of the three private keys to sign a transaction for it to be valid.
In the case of a personal wallet, one individual will control all the keys but hold them on different devices for increased security. See the savings wallet reference design for a UX exploration of this use case.
In the case of a shared wallet, different people will control the keys. The number of keys and required co-signers will depend on the use case. With spouses sharing a joint account, a simple 1-of-2 multi-key setup might suffice, meaning there are two keys but only one is required to sign for a transaction to be valid. At the other end of the spectrum, a company might require a more complex 3-of-5 setup, requiring three of the five co-signers to approve any transaction.
It is important to remember that the usage of multiple keys is necessary only for signing outgoing transactions, but not for receiving funds. This is a common misunderstanding.
Multi-key schemes can raise the security, since anyone needs access to more than one key to move any funds. But clearly, it also increases complexity and the requirements on the user to keep even more keys securely stored and/or backed up.
Tip
The keys used by a lightning node cannot be controlled by a multi-key setup, as they need to be continuously available to the node.
How it works #
A software wallet application or coordination software initiates a multi-sig wallet, choosing the number of total keys, and the number required to sign transactions. You then add private keys from other wallets generated elsewhere to the multisig after which the software wallet can complete the creation process. For any future transaction from the multi-sig wallet, the required amount of co-signers need to sign (using Partially Signed Bitcoin Transactions - PSBT from BIP174) before any transaction is valid.
Pros
- Significantly increases security against theft
- Can allow several people to access and control a shared wallet
- Can tailor requirements for multiple co-signing and access situations
Cons
- Has significant complexity and op-sec burden for multiple private keys, each of which needs a good backup scheme
- Not compatible with lightning node wallets
Best practice #
When to use
- When storing large amounts
- When funds need to be accessed by several people or an organization
- When target audience is likely to own hardware wallets
- When users are likely to be very knowledgeable or be guided through setup and use
- When most users are likely to implement good backup schemes for multiple keys
When not to use
- For small amounts
- When users are likely to be new to bitcoin
- When controlling a lightning node
Variations
- Number of total and co-signing keys
- Key storage devices and distribution
- Managed or completely self-managed
Do’s
- Make sure the multi-key setup itself is backed up properly, including extended public keys for all the participating keys, fingerprint and derivation.
Products that use this scheme
- Casa co-managed 2-of-3, or 3-of-5
- Electrum
- Bluewallet
- Unchained Capital/Caravan co-managed
- Specter
- Armory
- Guarda
- Revault - in development
Next, we do a technical deep dive into how transactions on bitcoin work.
As a seasoned expert in blockchain technology and cryptocurrency, I've delved deep into the intricacies of various cryptographic concepts and their practical applications. My expertise extends to the nuanced realm of wallet security and management, particularly in the context of multi-signature schemes.
The information you've provided touches upon the crucial topic of securing cryptocurrency wallets through multi-signature, or multisig, technology. This approach significantly mitigates the risk associated with a single point of failure by introducing multiple private keys that must collectively authorize transactions. This strategy proves invaluable in safeguarding funds against both theft and negligence.
In a multisig setup, the notation "n-of-n" is commonly used to signify the number of keys required to sign a transaction out of the total issued. For instance, a "2-of-3" configuration mandates that two out of three private keys must sign a transaction for it to be considered valid. This flexible approach allows for customization based on the specific use case, whether it's an individual managing multiple devices for enhanced personal wallet security or a shared wallet with multiple stakeholders.
The security benefits of a multi-key setup are evident, requiring access to more than one key to authorize fund movements. However, the complexity introduced should not be underestimated. Users must diligently manage and securely store multiple keys, necessitating robust backup schemes to prevent data loss.
The provided information also emphasizes the distinction between outgoing and incoming transactions in multi-key schemes. While multiple keys are required to sign outgoing transactions for enhanced security, receiving funds only requires a single key. This clarification addresses a common misconception in the crypto community.
Moreover, the article sheds light on the technical workings of a multi-signature wallet. It describes how a software wallet or coordination software initiates the creation of a multisig wallet by specifying the total number of keys and the required number for transaction signing. Private keys from other wallets are then added, and co-signers must collectively sign transactions for them to be valid.
The outlined pros and cons offer a balanced perspective, acknowledging the heightened security and shared control advantages of multisig while recognizing the added complexity and operational security burden. Additionally, the "Best practice" and "When not to use" sections provide practical guidance on the circ*mstances in which multisig is most beneficial and instances where it might not be the optimal choice.
Finally, the "Variations" section introduces factors such as the number of total and co-signing keys, key storage devices, and whether the setup is managed or self-managed. This highlights the adaptability of multisig to diverse user needs.
To further enrich your understanding, I can now delve into the technical deep dive into how transactions on the Bitcoin network operate.
