Wallet security is a major problem for crypto wallets. In 2024, private key compromises accounted for the largest share of stolen crypto, according to a Chainalysis report. The amount of stolen funds increased to $2.2 billion, and the number of individual hacking incidents increased from 282 in 2023 to 303 in 2024.
Multi-Signature Wallets Explained
A multi-signature wallet is a crypto wallet that requires multiple private keys to unlock as a way of enhancing security. For examples, a two-of-three multi-signature wallet would require a pass key from two of three cosigners on the wallet. This helps to reduce the potential for a single point of failure to cause a crypto wallet breach.
This report shows the unending increase in crypto hacks, which is a significant problem to blockchain security.
Multi-signature wallets have been introduced to solve this problem. These wallets make cyber attacks on crypto wallets more difficult by increasing the number of potential failure points that hackers encounter throughout the process. They originated in 2012 and were implemented in 2013. The first blockchain to incorporate them was Bitcoin.
What Are Multi-Signature Wallets?
A multi-signature wallet functions like a bank vault, requiring multiple private keys to unlock. Users can set the number of keys and the minimum required to perform actions. These wallets use a signature technique called M of N, where M is the minimum number of signatures needed and N is the total number of keys needed to sign the transaction.
For enhanced security, each user who owns a private key also receives a unique recovery phrase. This adds an extra layer of security to your assets, making it more difficult for a single point of failure like losing a private key or falling victim to a phishing attack.
For example, a two-of-three multi-signature wallet requires at least two signatures from a total of three cosigners or private keys to send a transaction out of a wallet. The wallet’s public address will be derived from the three private keys.
Multi-signature wallets can be set up with various M of N configurations, such as three of five, four of six, or even more complex arrangements. The choice depends on your specific security requirements and the desired level of access control.
Benefits of Multi-Signature Wallets
1. Increased Security Against Cyberattacks
Cyber attacks on crypto wallets are common. Multi-signature wallets add an extra layer of security against these attacks. Even if a hacker manages to compromise one key, they won’t be able to move any funds without access to the other required keys. This increases the difficulty for hackers and makes multi-signature wallets a much less attractive target.
2. Protection Against Single Points of Failure
Multi-signature wallets eliminate the single point of failure associated with a single private key because they require multiple keys to authorize a transaction. Losing one of the keys doesn’t give access to your assets. In addition, they eliminate the dependency on a single device. For example, one of the private keys can be saved on a smartphone, while another can be stored on a desktop or laptop.
3. Mitigation of Private Key Theft or Loss
If a key gets compromised, it doesn’t mean all is lost. The other keys are still there to protect your assets, and you can often re-establish access. However, cybercriminals are developing new methods to hack wallets.
4. Enhanced Control Over Fund Management
This is beneficial for business operations to prevent the misuse of funds. Multi-signature wallets enhance control over fund management, as two or three persons must authorize transactions, not just one.
For example, with a multi-signature setup, a single stakeholder can’t just make a large transaction without the agreement of other stakeholders in an organization. This adds an extra layer of securing funds and makes it much harder for someone to act alone, as everyone needs to sign off on a transaction, thereby strengthening accountability.
5. Reduction of Insider Threats
If an employee or partner who holds a key decides to act maliciously, they can’t unilaterally steal funds. The other key holders will have to be part of the transaction to move any assets. That level of accountability and shared responsibility makes it much harder to move assets, and that’s a huge win for security.
Applications of Multi-signature Wallets
Cryptocurrency Exchanges
For crypto exchanges, security is crucial. They hold massive amounts of user assets, making them huge targets for hackers. Multi-signature wallets are a critical tool in their security arsenal. By requiring multiple signatures to move assets, exchanges reduce the risk of internal theft or a single point of failure being exploited.
Exchanges also use multi-signature in their cold storage strategies. Cold storage means storing crypto offline, away from internet connections, to protect it from online attacks. Multi-signature setups allow them to securely manage these offline vaults, distributing key control among multiple custodians, further enhancing the security of assets.
Business Operations
Businesses, especially those dealing with crypto, often have teams managing their finances. Multi-sig wallets are ideal in this case. They allow multiple authorized people to access and control the company’s crypto holdings, requiring the agreement of several individuals to process transactions. This prevents a single rogue employee from making unauthorized moves and enables greater accountability.
Large businesses or decentralized autonomous organizations (DAOs) need safe ways to manage their crypto treasuries. Multi-signature wallets can ensure that no single person has the power to move company or DAO funds. This creates a system of checks and balances, increasing security and reducing the risk of loss, whether accidental or intentional.
Individual Users
Multi-signature is not meant for only institutions. It is also beneficial to individual users. Distributing private keys among multiple parties or devices provides a robust backup solution for your wallets. Using multi-signature setups, people can protect themselves from losing their funds due to a lost key, theft or other unfortunate events. If one key is compromised, the others still hold their authority.
Multi-signature wallets also offer innovative solutions for inheritance. Families can set up wallets that require multiple signatures to move funds, which can be distributed amongst multiple family members. This can help manage inheritance processes in a more secure and transparent way while making sure the funds are handled responsibly in the event of an emergency. It ensures that assets can be passed down according to the owner’s will and reduces the risk of legal complications.
3 Examples of Multi-Signature Wallets
1. Cashmere
Cashmere is a multi-signature wallet built on Solana. The wallet allows management of funds within organizations easily. It supports both SOL and all Solana program library (SPL) tokens and can integrate with all Solana wallets.
2. MPCVaults
MPCVault is a non-custodial wallet for Web3 teams and businesses. It is multi-chain, multi-sig, and multi-asset.
3. Ownbit
Ownbit is a Cold and MultiSig wallet for Bitcoin, Ethereum, Tron and more. It uses two mobile phone to implement the cold wallet functions. Users do not need to buy additional hardware. It has a built-in cold wallet feature which makes it as secure as hardware wallets.
Challenges in Using Multi-Signature Wallets
While multi-signature wallets offer a robust approach to security, they’re not without issues.
1. Speed
Multi-signature wallets aim for higher security, but that often comes at the expense of convenience. The need for multiple signatures means transactions take longer to process. They require a more complex workflow for each transaction, and it can be a real hassle even if one of the required signers isn’t available.
2. No Legal Help
When several private keys are involved, there is no legal custodian of the funds deposited in such a wallet, which is actually shared with several owners of private keys. In the case of when there is a problem, it is difficult to get legal help.
3. Recovery
The process of recovering a multi-signature wallet is complicated because it will be done by importing the recovery phrases on different devices.
4. Complexity in Setup and Use
The setup process can be demanding, requiring multiple participants to coordinate, generate keys, and configure the wallet. It is not as simple as creating a regular or single signature wallet; you need to understand the concept of shared control and the different signing thresholds.
5. Potential for Human Error
With multiple participants and more demanding processes, there’s an increased risk of human error. Someone might misplace their private key, forget the signing order, or unintentionally sign a malicious transaction. These errors can lock up the funds in the wallet, sometimes permanently.
Multi-signature wallets are important for blockchain security as they offer numerous benefits to individuals, businesses and blockchain entities.
Despite the challenges associated with multi-signature wallets, they are still safer for business operations and reducing wallet hacks. They improve security, ensure unanimous decision-making, and make crypto management more credible.
