The immense security benefits of multisig transactions have become especially relevant as bitcoins—like all valuable things—are prominent targets of theft. Where users choosing the convenience of web wallets once had to worry about being “Goxxed,” multisig has stepped in to save the day.
To be Goxxed (as you may know all too well) is to lose your bitcoins because you stored your private keys with a third party who turned out not to be trustworthy. Vitalik Buterin has explained that in Bitcoin’s first four years, all web wallets and exchanges worked that way: each Bitcoin address had only one set of private keys, and using the convenience of web-based services meant having to trust a company to keep your keys safe.
This single-point-of-failure model birthed several widely-publicized disasters, and multisignature addresses presented the solution as Bitcoin Improvement Propsal #10, or BIP 10.
BitGo is recognized as the first wallet to offer multisig services, in which a Bitcoin address possesses not one, but three individual sets of private keys. Two sets of keys go to the user—one is stored on her computer, and the other is stored somewhere offline (on paper in a safe, for example). The service provider then holds the third key. A signature by two of the three keys is required to execute a transaction (called a “two of three”), and this simple process provides several benefits.
First among them is the guarantee that the wallet provider is mathematically unable to steal a user’s coins—the company possesses only one of the two keys needed to sign a transaction.
Next is the benefit of two-factor authentication, offered by BitGo and others. When a user initiates a transaction from his wallet, the provider will send a text message asking the user to confirm that it was legitimate (in case his wallet account was hacked due to a keylogger or other malware).
Once the user receives the text and confirms, the wallet company signs with their key, providing the needed two of three signatures. Users can even pre-program their wallets to enforce spending limits, and many multisig wallets will ask for additional confirmation for large transactions.
Thirdly, the user could forget his password (losing access to the web wallet account) and still recover the funds, since he still has the paper key in the safe and can create a new account (with the same provider) using the same multisig address. Even if the wallet service were to go down for whatever reason, a user who’s recorded both of his keys would still be able to recover all funds.
Another perk is the ability to grant other people access to your funds in the case of a certain event. For example, you could give both a friend and a mediator one key each, to be used in recovery of your bitcoins in the case of your death. Neither your friend nor your mediator has access to your funds on his own—the two would have to collude against you to take your funds (and if your nearest and dearest are all thieves, you’ve got bigger problems in life than Bitcoin security).
In light of some government employees who’ve recently sought to impose coercive restrictions on Bitcoin businesses, hundreds of Bitcoiners have pointed out that it’s been innovations within the community (precisely like multisig)—and not government “regulations”—that provide the best consumer protection.
In addition to BitGo, other wallet providers currently offering multisig support include Coinbase, Armory, DarkWallet, GreenAddress and Copay (a beta project of BitPay). Currently in development is another wallet called Multisig+, which promises to support multiple cryptocurrencies, not just Bitcoin.
In a highly-praised article about the implementation of BIP 10, Buterin summarized:
“Multisig. . . offers a promise as an alternative to a regulation-centric approach to consumer protection – instead of trying to make absolutely sure that each individual business is trustworthy, we can set up systems to maximally remove single points of failure and rely primarily on safety-in-numbers.”
As more and more wallets begin to support multisig, it’s important to make sure that your wallet of choice is going about the software correctly. Buterin’s article further describes that wallet providers must use modular software implementation to protect against various vulnerabilities. If you’re using a multisig provider, it would be wise to check that their software is structure as described in the article.
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