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Standard bitcoin transactions are single-signature transactions because transfers require only one signature — from the owner of the private key associated with the Bitcoin address. Multisignature, or multisig for short, refers to requiring more than one key to authorize a Bitcoin transaction. It is generally used to divide up responsibility for possession of bitcoins, but has other useful functions.
Before we get into the details of multisig, a brief prelude about Bitcoin wallet addresses.
Bitcoin wallet address
A Bitcoin address, is an alphanumeric identifier of approximately 34 characters beginning with 1, 3 or bc1.
P2PKH (Pay To Public Key Hash) begin with the number 1 and is the first type of address and most common.
How does a multisig wallet work?
As mentioned, Bitcoins are usually stored in a standard, single-key address. Whoever holds the corresponding private key to the address is able to access the funds. In other words, only one key is needed to sign transactions.
Unlike single-key, the funds stored in a multisig address require more than one private key signature. Let’s think of a simple analogy from everyday life. If you need to get into your house then you may have multiple locks requiring different keys. Only with all of the keys can you open the door and get access. If you have two locks on the door and you need two seperate keys to open then this can be comparable to a 2-of-2 multisig address.
Why is multisig useful?
Single-key storage has led to a number of problems, particularly around security.
Any machine which stores a single-key wallet represents a single point of failure and this creates a target for cybercriminals. Multisignature gets around this single point of failure. Imagine that Bob creates a 2-of-3 multisig address and stores each private key in different places – one on his phone, his laptop, and one with a trusted third party. Even if one device is stolen, the thief won’t be able to access funds using only 1 of the 3 keys. Additionally, if one device is lost then Bob will still be able to access the funds since only 2 of the 3 keys are required.
The idea of trust-less escrow is an interesting use case of multi-signature wallets.
In a buyer-seller scenario, both parties can agree to place a third key with a trusted third party that acts as arbitrator. . If the transaction goes smoothly, then both the buyer and seller sign the transaction to forward the money to the seller and the third key is not needed. If there is some disagreement then the third-party will arbitrate and provide a second signature. This is an example of a 2-of-3 multisig in use. Important to note that the arbitrator cannot steal the money as they have only one key.
Types of multisig
We have already mentioned 2-of-3 multisig, which is the most common. However, most wallets will allow you to define the number of keys and signatories. There is a maximum of 20 defined, but in practical terms most use cases will not need this many.
- 1 key of 2: A couple has a shared account and they trust each other. They both share the same money while using their own separate wallet.
- 2 keys of 2: Two-factor authentication for your money. You keep one key on your computer and another key on your phone for example.. Whenever you want to spend money, you have to use both. 2-2 can be dangerous.
- 2 keys of 3: Trustless escrow mentioned already
For more examples, we recommend you read this page on the bitcoin wiki.
How do I create a Multisig address?
For example, in BitPay you can create a shared wallet and define the “total number of copayers” and the “total number of signatures”. The max copayers is 6 and the max signatures is 3. After creating the wallet you are then given a QR code to share with others you want to include in the multisignature wallet. To join a shard wallet you select add wallet and “Join Share Wallet”. You then put in your name and the wallet invitation code you received.
Note: each copayer has their own recovery phrases. To recover funds in a shared wallet you will need the recovery phrase from each copayer.
Multisig wallets have a lot of interesting applications. Enhanced security and trustless escrow are only two examples mentioned here. It’s still early days for this technology and you can expect it to be a significant aspect of future bitcoin applications.
For more info on multisig you can contact us at email@example.com
To understand SegWit, read our post here.