What is a Multisig wallet? Why should we use it?
- 1. What is a Multisig wallet?
- 2. How Multisig wallet works
- 3. Features of Multisig Wallet
- 3.1 Advantages
- 3.2 Cons
- 4. The functionality of the Multisig wallet
- 5. Security features of the Multisig wallet
- 6. Top 5 most reliable Multisig wallets for Bitcoin
- 6.1 Electrum (Mobile Wallet / Desktop Wallet)
- 6.2 Copay (Mobile Wallet / Desktop Wallet)
- 6.3 Armory (Desktop Wallet)
- 6.4 BitGo (Web / Mobile / Desktop Wallet)
- 6.5 Coinbase (Web Wallet)
- 7. Instructions for installing Multisig wallet
- 7.1 How to create a Multisig wallet on Gnosis
- 7.2 Notes when using Multisig wallet
- 8. Use case of Multisig wallet (multi-signature wallet)
- 8.1 Two-Factor Authentication
- 8.2 Escrow Service
- 8.3 Improve security
- 9. Are Multisig wallets being taxed?
What is a Multisig Wallet? Is it safe to use a multi-signature wallet? In this article, BHO Network will share important information about Multisig wallet. Let's find out.
1. What is a Multisig wallet?
Multisig wallet is an acronym for multi-signature. This type of signature requires two or more private keys to sign and send transactions. This storage method allows the creation of a multi-signature created by a combination of multiple signatures.
The term multi-signature can be used in different contexts, but most use cases are related to security issues.
Multisig wallet is used mainly in regards to security.
2. How Multisig wallet works
For simplicity, we can think of it as a safe deposit box with two keys and locks. One key is held by Alice and Anna holds the other one. The only way to open the box is to have two keys simultaneously. So one person cannot open the box without the consent of the other.
Basically, funds stored on a signature address can only be accessed using two or more signatures. So using a multi-signature wallet allows users to create an extra layer of security for their funds. But before going any further, it's important to understand the basics of Bitcoin address, which are based on single-key rather than multi-key.
By extension, the person setting up the Multisig wallet can choose how many keys are allowed to open the vault and the minimum number of keys needed to unlock it.
- A 4-of-4 multi-signature wallet means a total of 4 signatures and requires four signatures to unlock a transaction.
- Similarly, if it is 2 - of - 4, then there are four signatures in total, and it takes two co-signers to sign a transaction.
The working mechanism of Multisig Wallet
3. Features of Multisig Wallet
Like other cryptocurrency technologies, the Multisig wallet offers many advantages but also many limitations. Let's find out through the section below.
The biggest strength of Multisig wallets is to help increase security if used correctly. By using a multi-signature wallet, users can prevent problems caused by lost or stolen private keys. So even if one of the keys has problems.
In addition, a multi-signature wallet will help a DAO manage funds effectively, DAOs now often use multi-signature wallets to control access to the project's funds.
Multisig Wallet Increases Security When Used Correctly
Although the Multisig wallet is an excellent solution to many problems, there are risks and limitations. Setting up your multi-signature address requires some technical knowledge, especially if you don't want to depend on third-party vendors.
In addition, multi-signature wallets are also inflexible in some cases. The access structure in the Multisig solution is tied to the address. So what happens when you want to change the multi-signature wallet access policy with an old party, and they don't cooperate?
Or as in the case of the OKEx exchange that happened a few months ago. When the exchange halted withdrawals, they explained that one of the main owners of the Multisig wallet cooperating in the investigation with the government had "lost contact". So OKEx cannot let users withdraw money.
Setting up a Multisig wallet requires some technical knowledge
Read more: Hot Wallets vs Cold Wallets, What Is The Better Choice?
4. The functionality of the Multisig wallet
You can choose the number of signatures to be used or authorized and the minimum number needed to allow a transaction when creating a Multisig wallet.
Two out of three wallets are the most popular multi-letter wallets created. Therefore, only two signatures are required for you to make one transaction. This feature usually works the same way banks need to sign.
But since Blockchain technology doesn't work on trust, it's built on consensus and cryptography, which makes it virtually unbeatable. Therefore, an individual or an organization will not be able to hold your money arbitrarily at any point in time.
When creating a Multisig wallet, you can choose the number of signatures.
5. Security features of the Multisig wallet
With the Multisig wallet, users can prevent problems from losing or stealing private keys. So the money will still be safe even if one of the keys is compromised. A thief can hack or break into your key when a mobile device is stolen.
But in case you still have two keys left, you can still access your funds with those two keys.
Multisig wallet has high-security features
6. Top 5 most reliable Multisig wallets for Bitcoin
After clearly understanding a Multisig wallet, let's talk about some of the most trusted Multisig Bitcoin wallets.
6.1 Electrum (Mobile Wallet / Desktop Wallet)
Electrum is a lightweight wallet with multi-signature support and cold storage. This wallet is considered the oldest on the market. Electrum runs under the MIT license as an open-source project. For this reason, there is no point in failure, and anyone needs to be able to run Bitcoin nodes on it.
Electrum can be integrated into third-party wallets such as Keepkey, Ledger and Trezor. With this wallet, you can create authorizers up to 15 of 15 for a Bitcoin transaction. It is currently available on Android, Linux, Mac OSX and Windows.
Electrum Wallet can be integrated into 3rd wallet
6.2 Copay (Mobile Wallet / Desktop Wallet)
HD Wallet uses a multi-signature address to protect funds. There are no 3rd parties or hidden servers, and users are solely responsible for their private keys. Copay is the first of a single multi-signature wallet that allows testing on iOS and Android.
You can test how the wallet performs before deploying it. To sign Bitcoin transactions, Copay users can create up to 2 out of 3 authorizers. It is currently available on Android, iOS, and Chrome Extension.
You can try out Copay on iOS and Android
6.3 Armory (Desktop Wallet)
This HD Bitcoin wallet allows users to access their private keys without depending on any 3rd party server. Armory is an open-source wallet with Multisig support and cold storage facilities. Users can create a variety of sig addresses, complete with a lockbox feature.
6.4 BitGo (Web / Mobile / Desktop Wallet)
BitGo has been one of the mainstays in the crypto world since 2013. It supports Multisig functions and is largely popular with users. BitGo is also well known for its success in energy exchanges like Kraken, ShapeShift, and UnoCoin through API service.
Bitgo Wallet is well-known in the crypto world
6.5 Coinbase (Web Wallet)
Coinbase is a popular Bitcoin wallet in the market. This is a hosted wallet, so they control the private keys for you. Additionally, Coinbase also offers non-hosted multi-wallets. In this case, you control your private keys.
The Coinbase system uses a 3-key system: a user lock, a Coinbase key, and a shared key that allows you to control the funds. To authorize any transaction, 3 of the three authorization keys must approve the transaction.
Coinbase wallet is currently extremely trendy in the market.
Read more: What is Bitcoin Taproot? Detailed info about Bitcoin Taproot
7. Instructions for installing Multisig wallet
After understanding the Multisig wallet, BHO Network will explain the steps to install the Multisig wallet.
7.1 How to create a Multisig wallet on Gnosis
Step 1: Access the Gnosis Safe application
Gnosis Safe application interface
Step 2: Connect your wallet account
After opening the application, the right corner selects Blockchain network. Gnosis Safe supports Ethereum mainnet, BSC, Polygon, etc. You can also test it on Rinkeby Testnet to find out how to use the wallet first.
You can use Metamask wallet and add other Chains like Polygon, BSC,... to Metamask wallet for ease of use.
Connecting the wallet
Here, select the BSC network (do not use the main wallet), should create a secondary account for safety. Then click "connect".
Connect your wallet account
Step 3: Create a new Safe
Select Create new Safe then you can go through the steps to create your wallet. You must enter the name, owner address, quantity, required confirmation, etc.
Create a new safe
Step 4: Using the Multisig wallet
After creating the Multisig wallet, you can get the wallet's address on the dashboard website. For other owners, ask them to do the first step and the second step. Next, select "add existing safe" to fill in the name and address of the Multisig wallet you created.
Now you can use the Multi-signature wallet
Then you can start sending Tokens to this address to check. Tokens will show up inside the Assets -> Coins Menu.
7.2 Notes when using Multisig wallet
You should choose the right Blockchain network when creating your wallet and depositing money.
Multisig wallet supports almost all Verified Tokens. If you have some unique token, you want to store it. You can ask them to assist in displaying it inside the dashboard.
The number of owners and required assertions is unchanged. If you want to update, you should create a new wallet and transfer all assets to the new wallet. Only the last person to confirm the transaction before executing must pay the gas fee.
8. Use case of Multisig wallet (multi-signature wallet)
In any case, it is recommended to use a multi-character (Multisig) wallet. Please reference this section is shared by BHO Network.
8.1 Two-Factor Authentication
Bitcoin wallets generally do not use 2-factor authentication. But this is an important feature of online accounts like cloud storage. For multi-signature wallets, 2-factor authentication can be very useful.
How it works:
- When you initiate a transaction via phone or computer, it must be signed through an online service. To complete the transaction, you must enter the 2-factor authentication code.
- You get the code in the mail, email or hardware device, whichever you choose. Alternatively, you can create transaction limits on your account or set unique identifiers for each transfer.
- You won't be able to access your funds if the 2-factor authentication service is offline or hacked. In this case, if someone has access to both your paper wallet and the device where the 2-factor authentication code was sent, they will have access to your security settings.
Multisig wallet is authenticated with 2 factors, so it is highly secure
8.2 Escrow Service
Let's look at this example: Peter sells Anna some items online. Peter and Anna have never met before. Therefore, they don't trust each other.
The way to solve this is for both of them to create a 3rd party trust using a multi-sig wallet.
How it works:
- Emma can be an organization or an individual. Peter and Anna don't necessarily have to trust Emma with their fortune. But they believe that Emma will not collide with other entities in the transaction.
- Peter can also confirm Anna's payment. At the same time, Anna only has 1 of the three signatures needed. Therefore, she cannot withdraw money after the goods have been dispatched.
- Once Anna has received Peter's goods, they can either sign or transfer the money to Peter. If all goes well, there will be no need for Emma's signature.
You must be cautious when using the escrow service.
- The escrow service is usually used in cases where none of the participants trusts each other. However, it is not easy to prove that Emma and Anna do not work together or that they are the same person. Besides, one of the parties could try to bribe Emma.
8.3 Improve security
If you are worried about the security of your phone or computer, it may be compromised. You can enhance your security with one of 2 multi-signature wallets.
How it works:
- Before making a transaction, you must initiate it on one device so it can be reviewed and confirmed on another device. You can start as simple as scanning a QR code.
- You can hardly use just 1 device to make any transaction. For this reason, you won't lose your Bitcoins if you get hacked on your phone, computer or tablet.
Using a multi-signature wallet is very safe because of the 2-factor authentication.
- You will lose all your Bitcoins in case you lose or break both your phone and computer at the same time. To prevent this, you should create a backup of your e-wallet.
- However, you still have to be careful about how archiving is done. Don't keep two or more backups in the same place unless you're sure they're safe.
9. Are Multisig wallets being taxed?
The Multisig wallet itself is not taxed. The transactions you make in connection with your Multisig wallet may be subject to tax.
Cryptocurrency taxation varies depending on where you live. This shows that, in general, tax offices have taken a fairly consistent approach to crypto taxation. Cryptocurrencies are subject to income tax or capital gains tax.
Multisig wallets themselves aren't taxed.
Not all cryptocurrency transactions are taxed in most countries. You pay taxes only when you see you are generating income or disposing of a crypto asset. So, tax-free crypto transactions include
- Buying crypto with fiat currency - like USD or AUD.
- Hold Cryptocurrency.
- Transfer between Wallets.
Until now, we have come together to find the answer to the question "What is a Multisig wallet?" Hopefully, with this knowledge, you will better understand multi-signature wallets. If you have any questions, please feel free to contact BHO Network.
Published on February 15, 2022
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