Multisignature wallets: a security system requiring multiple keys

As the number of cryptocurrency users grows, security becomes an increasingly pressing issue. According to Glassnode, the number of active BTC addresses has reached 55.1 million, and there are over 1.21 billion Bitcoin addresses in total. This indicates an exponential growth of the crypto market and simultaneously increases the risks associated with protecting digital assets.

Why are classic wallets no longer sufficient?

A traditional cryptocurrency wallet operates on a single private key — a kind of digital password that provides full access to funds. This simplicity has a downside: losing the key means losing access to assets, and its compromise means theft of funds.

History provides a shocking example: one company lost $137 million when the CEO, who held the only private key, passed away. Restoring access to the assets was impossible. Such situations have prompted the crypto community to seek alternative solutions.

What is a multisig wallet?

A multi-signature wallet is a technology that requires the simultaneous use of multiple private keys to confirm a single transaction. The easiest way to imagine it is as a safe that requires two, three, or more keys from different people to open.

The system works on an m-of-n scheme, where m is the number of signatures needed, and n is the total number of keys. For example:

• 2-of-2: both parties must sign
• 2-of-3: two out of three signatures are sufficient
• 3-of-5: three signatures out of five are required

The main advantage of this scheme is that losing one key does not mean losing access. If you have a 2-of-3 configuration and lose one key, the remaining two still allow operations.

How it works: step-by-step process

Suppose you create a 3-of-5 multisig wallet, assigning five key holders (conditionally: Alex, Maria, Ivan, Sergey, and you). The process looks like this:

1. One of the holders initiates a transaction and sends it to all others
2. The remaining four receive a notification and can see the transaction details
3. Three of them decide to approve and add their digital signatures
4. When the required number of signatures (3) is collected, the transaction is automatically executed

Key point: the order of signatures does not matter. Signatures can be added in any sequence, and any three of the five participants can authorize the operation.

Benefits: from security to democracy

Multi-layered protection

Hacking one key does not give cybercriminals access to funds. In a 2-of-3 wallet, a compromised key becomes useless, as two more signatures are still required. This is a redundancy principle: the system does not depend on a single point of failure.

Prevention of impulsive decisions

Organizations often use multisig to prevent unauthorized spending. The CFO cannot transfer large sums alone — approval from the board of directors is required. This functions as an embedded governance system, where the wallet demands consensus.

Escrow and trust operations

In deals between strangers, multisig provides neutrality. The buyer and seller deposit funds into a 2-of-3 wallet, where the third key is held by an independent arbitrator. No one can withdraw the money unilaterally until part of the agreement is fulfilled.

Inheritance and long-term storage

If one key holder becomes unavailable (due to illness, death), the remaining keys still function. This is critical for corporate treasuries and family assets.

Disadvantages: the price of convenience

Slower operations

A classic single-key wallet allows transactions to be completed in seconds. Multisig requires coordination among participants — the process can stretch to hours or days if some holders are unavailable.

Demands on expertise

It’s not just about pressing a button. Understanding how it works, properly distributing keys, storing backup phrases is required. Mistakes in setup can lead to irreversible consequences.

No insurance

The crypto market remains unregulated, and funds in multisig are not insured. If all keys are lost or compromised simultaneously, recovery is impossible.

Vulnerability to scams

Fraudsters create fake 2-of-2 wallets that actually use a 1-of-2 scheme, where the second key is under their control. Victims send funds thinking both parties must sign, but the money goes nowhere.

Multisig vs single-key wallets: a full comparison

Who needs this?

Individual traders: For small amounts, a classic wallet is more convenient, but for long-term storage of large BTC holdings, multisig adds peace of mind.

Companies and NGOs: Here, multisig is almost mandatory. It ensures that no employee can appropriate corporate assets.

Family funds: Distributing keys among family members ensures access and protection of inheritance.

Government and official structures: Require maximum transparency and multi-level control.

Practical solutions on the market

Several proven platforms offer multisig functionality:

• BitGo — specializes in institutional-grade storage
• Electrum Multisig — open source, full control
• Casa Keymaster — user-friendly interface for beginners

Final summary

Multisignature wallets are not a panacea but a tool that addresses specific tasks: risk distribution and creating a system of checks and balances. They require more time for setup and operations but offer an unparalleled level of security for collective asset management. The choice between multisig and single-key wallets depends on your needs, the volume of funds, and the level of trust among participants.