What Are Multi-Signature Wallets?

Multi-signature wallets are a type of cryptocurrency wallet with additional security settings that is typically used to require two or more people to authorize an outgoing transaction. Sometimes called “multi-sig,” these wallets are most useful when cryptocurrency or other digital assets are owned by multiple individuals or are held in custody by a company.

These cryptocurrency wallets take more technical knowledge to set up and use than a traditional crypto wallet, which only requires one signature. However, the added security benefits make the additional technical requirements worthwhile for those with complex security needs.

Understanding Multi-Signature Wallets

While cryptocurrencies and digital wallets offer many advantages and security features, there is no shortage of horror stories about lost cryptocurrency funds and stolen assets when only a single individual knew the passwords or had access to the keys to access the wallet’s contents. Multi-signature wallets aim to solve this problem.

With a multi-signature wallet, two or more wallets may be required to access the contents. This may rely on having two wallets together, three wallets together, two out of three wallets, or any other combination.

There is no limit to the number of signatures required to unlock the underlying wallet. Aside from the logistical and technical challenges of setting it up and using it, there is no reason a multi-signature wallet couldn’t require five, 10, or more signatures.

Many infamous examples of lost or stolen cryptocurrencies could easily have been avoided using multi-signature wallets. For example, the Turkish founder of cryptocurrency exchange Thodex made headlines for vanishing with client assets. If the exchange involved had required multiple signatures, that single founder might not have had the power to access the funds independently. This could also thwart the efforts of hackers who could only get access to one of the required signatures.

Multi-Signature Wallets Versus Other Crypto Wallets

Most cryptocurrency wallets rely on a single public address and private key. The public address is used to receive cryptocurrency, non-fungible tokens (NFTs), or other assets from others. A private key is required to access the wallet’s contents and send an outgoing transaction.

If you use a software or hardware cryptocurrency wallet yourself, it automatically stores your addresses and private keys, so you need only remember a PIN or password. Every wallet uses different software and encryption to keep your keys and crypto assets safe. But multi-signature wallets take this one step further by requiring multiple inputs to get to the private key.

For example, two users may have to unlock their individual wallets to get to the shared private key for the wallet holding the shared assets.

The most robust multi-signature cryptocurrency wallets require multiple physical hardware wallets to be unlocked. The user wallets each contain a portion of the underlying wallet’s private key or another access code that can be used in combination with others as a password or key for the primary wallet.

Goals of Multi-Signature Wallets

In the movies, you’ve likely seen a situation where two military members were required to turn keys simultaneously to activate a weapon. The idea is that a single person can’t unleash the weapon alone. It takes agreement and coordination between two authorized people with the right keys. The goal of multi-signature wallets is somewhat similar.

If you deposit funds with a cryptocurrency exchange or crypto IRA provider, you likely don’t want your assets held in the hands of a single individual or entity that could steal your currency and vanish. You would want two people to have to turn the keys at the same time to ensure that every withdrawal from the custodial wallets is authorized and used properly. Multi-signature wallets can enforce that requirement.

For most individuals, multi-signature wallets aren't necessary. Unless you’re holding assets jointly with a spouse or friend you don’t trust, you probably can stick with a traditional cryptocurrency wallet requiring just one password to open it.

The Bottom Line

Multi-signature crypto wallets that require two or more people to approve an outward transaction lend increased security for crypto assets, but they also require greater technical knowledge to establish.

These wallets are put in place to limit the theft of crypto that can occur when use of a sole individual's password or wallet key is enough to access the funds. Multi-sig wallets are usually best suited for businesses or group-owned crypt assets; most individuals probably don't need them.