Security is the number one priority when it comes to transacting with cryptos in light of increasing breaches and hacks in Web 3.0. In 2022 alone, a total of $3.8 billion in reported losses were stolen from compromised wallets, accounts, transactions, and blockchains.
Therefore, it is essential to ensure the safety of your digital belongings, especially since you cannot store them physically like fiat money. Multi-signature crypto wallets have gained popularity recently due to their extensive security features, requiring more than one verification to transact.
Needless to say, crypto wallets are the first thing that comes to a hacker’s mind because it is where digital money is stored. So, here is how you can have a secure crypto wallet.
What Are Multi-Sig Wallets?
A traditional crypto wallet has one owner who manages the wallet, issue transactions, and configure its settings. Also, conventional wallets have one 12-word secret code (seed phrase), and if you lose this code, you will not be able to access your digital wallet and funds.
However, multi-signature wallets have more than one owner, and each owner has a distinct seed phrase. Participants share the multi-sig wallet, and a single transaction requires more than one confirmation to be finalised.
Therefore, these multi-user wallets are more secure, especially if they belong to an organisation or more than one person must access the wallet to trigger transactions.
Multi-sig Wallets vs Regular Crypto Wallets
Transactions in regular wallets can be triggered with one private key and one user. Therefore, any unauthorised access can steal any available funds stored. However, shared wallets incorporate an additional security layer. Let’s compare these two wallets head-to-head to find out what suits you better.
Multi-Sig Crypto Wallets
Shared or multi-sig wallets work by consensus method to issue wallet operations. For example, if a user wants to send Bitcoin to another account, the majority must approve this transaction before it goes through. Consensus must be reached “3 of 5” or “2 of 3” must verify the transaction.
This additional verification protocol is powered by the fact that each user has a unique private key, and more than one key is needed to encrypt the message and deploy smart contracts.
Regular Crypto Wallets
On the other hand, one-user crypto wallets need only one signature of the private key to start transacting. Therefore, if the private key gets compromised, finds can be stolen.
Note that crypto transactions are immutable, and once the money is sent, you cannot reverse the operation to recover the money.
Pros and Cons of Multi-sig Wallets
Shared crypto storage seems like a great deal. They are safer and more functional. However, there is a reason why the majority still use a regular crypto wallet. Let’s review in a nutshell the pros and cons of multi-signature wallets.
- Multi-sig wallets emphasise decentralisation and shared control, which are the main aspects of cryptocurrency.
- Storing your digital money in a more secure environment.
- The ability to recover your secret code using other participants’ secret phrases.
- The ability to configure users’ access and private keys and remove/add new participants.
- Preserving users’ identity, where wallet members cannot access each other’s private information.
- Better scalability and more use cases.
There are a few challenges to these new types of wallets, which offset many of their advantages.
- Not many users fully understand how to use multi-signature wallets and prefer to stick with what they already know.
- Complicated structure and usability compared to conventional wallets and failure to correctly use these wallets and configurations may lead to money waste or loss of control.
- Shared-use wallets are not as popular, and only a few websites/applications support shared wallets.
A crypto wallet that requires more than one signature promotes higher security, which is the notion of decentralisation and the crypto world. Multi-sig wallets enforce funds safety by adding an additional verification step, requiring more than one private key to verify wallet operations.
Shared wallets have more use cases and scalability than regular ones. However, they still have a long way to go and prove their worth for the basic crypto user.