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.
There are various apps that make it super easy to implement and use K of N scheme multisig wallet.
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.
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.