What is a multisig wallet ?
Unlike regular accounts, multisig accounts require more than 1 signature to execute a transaction.
Think of them like a bank that requires more than 1 person’s signature to pass a cheque.
K of N multisig scheme
Multisig accounts can be initialized to require more than 2 signatures.
In general, multisig scheme can be initialized to have K number of participants, N of them be required to sign a transaction to be executed.
Demo
There are various apps that make it super easy to implement and use K of N scheme multisig wallet.
Usecases
Multisig wallet schemes make it difficult for hackers to steal funds because they will have to hack a whole bunch of accounts before they can access the funds.
However, multisig schemes have disadvantage as large effort is required to coordinate actions to execute a transaction.
Hence a multisig scheme has to be delibrately designed to solve a particular use case. Some popular use cases are:
Self custody solution
2 of 3 multisig scheme is a popular solution for individuals holding a large amount of crypto.
A user can generate 3 accounts, 2 of which are required to sign a transaction.
The user keeps 2 accounts separately that he can access and hand over the third account to a custodian he trusts.
The custodian cannot spend funds as he has just 1 account, however, user can ask the custodian in case he loses any of his accounts.
There are several companies like Unchained capital that provide third-party custodian services for a fee.
Multisig for business
Companies can implement multisig wallet scheme so that no one individual has access to all the company’s funds and only transactions approved by the majority get executed.
Escrow Transactions
A 2-of-3 multisig wallet can allow escrow transactions between two parties (A and B). The transaction also includes a third party (C) as a mutually trusted arbiter if anything goes wrong.
