What is Multisig – A Beginner’s Guide
By: Ofir Beigel | Last updated: 1/21/21
Multisig is a feature that makes Bitcoin wallets more secure, allows for more corporate use cases, makes trustless escrow/arbitration possible, and generally solves lots of problems. But what is it, and how do I use it?
This post explains it all.
What is Multisig Summary
Multisig is short for multi-signature, a lock that only opens with enough keys, out of a set of predefined keys. For example, you can set a multisig wallet to only send a transaction if at least 2 out of 3 key holders sign on it.
Multisig is available only in a handful of Bitcoin wallets and is most useful for managing a joint account or adding extra security to an individual account.
That’s multisig in a nutshell. For a more detailed explanation keep on reading, here’s what I’ll cover:
For the sake of this article and without getting too complicated, you can say that Bitcoins aren’t actually moved between addresses, but rather they always just sit in an invisible vault. Also, instead of sending them, you actually just change the locks.
For example, when Alice makes a simple, normal Bitcoin transaction to Bob, she’s actually just removing her lock from the vault with her key, and putting Bob’s lock on it (which Bob can later remove with his key and so on).
So far, it’s pretty simple. It starts getting really cool when you think about more complicated locks.
See, Bitcoin has a scripting language built in that allows you to design all kinds of locks:
- Locks that aren’t locked, so anyone can open the vault without a key.
- Locks that only lock after a certain amount of money is put in (so you can crowdsource Bitcoins).
- Locks that cannot be unlocked before a certain amount of blocks are found (say, for instance, when your child reaches age 20).
- Locks that require several keys to open them (i.e. multisig).
Multisig is short for multi-signature, a lock that only opens with enough keys, out of a set of predefined keys.
Let’s say that Alice, Bob, and Charlie all want to open a business together and invest some of their money. For obvious reasons, none of them actually want only one person to have the private keys to this money.
So, they each get one key and use a multisig wallet that requires two out of three of those keys. This way none of them can run away with the money alone, yet they don’t need all three of them to pay an expense.
For example, if Alice wants to run with the money, she can’t because she only has one key. On the other hand, if Bob is missing and Alice and Charlie want to pay an expense, they can do it with their two keys (out of the three).
Multisig doesn’t have to be two out of three – it can be almost any combination. Let’s think of a few combinations and some examples of how to use them:
1 key of 2: A couple wants to have 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. Whenever you want to spend money, you have to use both.
2 keys of 3: Trustless arbitration or Bitcoin escrow. Someone wants to buy a product from a stranger on the internet, but cannot trust him. The buyer and seller agree on an arbitrator who will help them in case of a dispute.
They each get one key out of three, and the buyer sends the money to the multisig address. If the product is delivered and there are no issues, the buyer and seller can use their two keys to release the money to the seller.
However, if there is a dispute, the arbitrator can help the buyer to get a refund, or the seller to release the funds (Bitrated is a good example of that).
2 keys of 3: Safer paper wallets. Instead of having one key with access to all your money, why not make it two? The third key is a backup in case you lose one of the other two. For example, keep one key on your phone, another key where you would keep your paper wallet, and a third key with a trusted family member.
4 keys of 7: Company board of directors. Suppose a corporation has a board of directors who wish to own the control of the corporation’s reserves, instead of trusting their executive management to handle all their money.
The board of directors can decide that a majority vote (four out of seven) should be enough to delegate funds to executive management.
All of the above examples would traditionally require a financial institution or third party to mediate, but with Bitcoin, it is all programmed directly into the payment and secured by the Bitcoin network.
This is why I personally find multisig technology to be one of the most impressive working concepts that exist in Bitcoin today.
Electrum is a Bitcoin only desktop wallet that is feature-rich but not very user friendly. If you’re just getting started with Bitcoin, I recommend avoiding Electrum, but if you’re already familiar with the basic terms then this is an excellent choice.
Electrum is open source, you can read my complete review of it here.
Here’s how to create a multisig wallet with Electrum:
Armory is a Bitcoin only, open source, desktop wallet. Armory was designed from the ground up to give users the best of both worlds; It focuses first on maximizing security and then provides a well thought-out interface to make using this security as simple as possible.
Armory’s multisig function is called “Lockbox”, here’s how to use it:
Copay is a multisig, multiplatform wallet for Bitcoin and Bitcoin Cash by BitPay. The wallet initially had a user friendly website with easy to understand tutorials. Since then, it seems the project was somewhat abandoned by BitPay. Nowadays the website leads to the project’s GitHub page, which is useless for non-technical Bitcoiners.
Multisig is a pretty simple yet powerful technology that allows you an extra layer of security for managing your Bitcoins.
Here are some additional things to keep in mind before I wrap up:
- Always have backups to your keys! It is extremely important, just like with any Bitcoin wallet.
- Don’t require all keys (2 of 2 / 3 of 3 / 4 of 4 / etc.). If you lose one of the keys, you lose the money! If you have 2 of 3 or 3 of 4, you can still recover your money if you lose a key (better than regular Bitcoin wallets).
- You cannot make a wallet with an infinite amount of keys, there are some technical limitations.
Have you used multisig yourself? What’s your favorite multisig wallet? Let me know in the comment section below.