Breaking Down Multisig

Joe Howe
3 min readJan 4, 2021

--

What is Multisig?

First, it is important to understand that with Bitcoin you are never actually taking the coins off the Bitcoin blockchain. You are simply locking them up in a location (address) on the blockchain. In order for those fund in that address to be used you need the private key associated with the address. I will break this down further throughout the page.

Multi sig is short for multiple signatures. Essentially what this means is that in order to move Bitcoin funds you need a certain number of signatures from private keys (ex. A hardware device like a trezor holds a private key). A good analogy for this is to picture a safety deposit box held in a bank. The box has three key holes on it and in order to open the box you need to put at least 2 of the 3 keys in the box. It doesn’t matter which combination of two keys you use but you need at least 2 of the keys. The location of the security box with your name on it in the vault is your Bitcoin address and public key, the 3 possible keys you can use are your private keys. (break this down more later)

The most common form of multisig is the 2 of 3 setup. In this case you would have 3 total keys and would need signatures (approval) from 2 of the 3 keys in order for the coins to move. There are companies out there like CasaHodl and Unchained Capital that make the use of multisig extremely easy and user friendly, but there are also options to do it yourself which may require a bit more technical knowledge.

What are the “keys” in Multisig?

This topic can be a bit complex but I will do my best to simplify the technical concepts. In Bitcoin there are private keys, public keys and wallet addresses. The private key is a “secret” key that creates a digital signature which allows funds to move on the blockchain. The public key is used to receive funds and to allow the blockchain the ability to verify funds you have are yours. The private key also generates the public key which generates the wallet address. It is important to note that a private key cannot be determined from a wallet address or public key. This process moves in one direction.

Why is Multisig important?

Multisig adds an extra layer of security to storing Bitcoin funds by eliminating a single point of failure, which is seen in any single signature setup. Multisig at its base level is adding resilience to a Bitcoin hodlers operational security. The multisig security setup also allows the user to increase their margin of error. When you have 3 total keys you are now able to lose one of the keys or have one of the three keys get damaged without losing any funds. For example if you have a 2 of 3 setup (Keys: 1 Hardware device like a trezor or ledger, 1 key on your phone, and 1 emergency key with Casa) and you lose your Trezor or Ledger, you will not lose any funds because you will still have the two other keys (on your phone, and emergency key with Casa). You can then simply use the two keys you still have to move the funds to a new multi sig wallet with a new hardware device.

All in all multi sig is extremely good for the Bitcoin space as a whole because it makes using and securing Bitcoin much easier. This allows users to feel safe and at peace when storing their wealth in Bitcoin, which in turn makes the whole process of using Bitcoin more robust. This will allow for greater adoption on both the institutional side as well as the retail side.

--

--

Joe Howe

Bitcoin Enthusiast. Building a Crypto Tax Firm.