Multi-Signature Wallets: History, benefits and rogress

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If we analyze the concept of multi-signature from its beginnings, we can see that this concept has very ancient roots, since already in the Middle Ages partial keys, analogous to key fragments, were used to open catacombs containing relics. In this way, a single person could not have exclusive access, thus increasing the security of the place where the relics rested. Over the years, multi-signature has evolved significantly, and today it is especially valued with the advent of public key cryptography.

This article examines the technical workings of multisignature, its advantages and challenges, and concludes with a detailed explanation of MuSig2, a Schnorr signature-based extension that optimizes multisignature transactions on Bitcoin and other supported blockchains.

Introduction to multi-signature wallets or multisig

Multisig wallets require more than one private key to sign a transaction to authorize it, adding an extra layer of security. Unlike single-sig wallets, where a single private key is responsible for all control, multisig wallets divide that control among multiple keys, reducing the possibility of funds being compromised by the loss or theft of a single key.

This type of wallet allows the configuration of the minimum number of signatories required to approve a transaction. The number of required parties can be configured at the time the wallet is created, allowing for configurations such as 2 of 3, 3 of 5, or even more complex, depending on the needs of the user or organization. For example, in a 2 of 3 configuration, out of three private keys generated, only two are needed to sign a transaction.

Types of multi-signature wallets

There are two major types of configurations:

N-of-N: All private keys are required to approve a transaction. For example, in a 2-of-2 configuration, both keys are required to approve a transaction.
N-of-M: Only a minimum number of keys are required from the total number of keys assigned. For example, in a 2-of-3 configuration, any combination of two keys is sufficient to approve a transaction.

The different types of multisignature allow users to tailor security to their needs, providing flexible options for individual, collaborative, and enterprise environments

Multi-signature and on-chain security

One of the most important aspects of multi-signature wallets is how they provide an additional layer of security on the blockchain. Simply put, it acts as a form of on-chain two-factor authentication (2FA), where more than one party is required to approve a transaction. This not only increases security, but also distributes control, which is especially useful in situations where large sums of money are being handled, or where transparency and collaboration between multiple parties is required

It is important to note the difference between on-chain and off-chain multi-signature schemes

On-chain: On-chain multi-signature systems record all signatures and transactions directly on the blockchain. This ensures transparency and tamper resistance, as all transactions are publicly available and auditable. Examples include the schemes used in Bitcoin, Ethereum, and Litecoin, which ensure that transactions are validated and recorded securely and verifiably on the blockchain.
Off-chain: In contrast, off-chain multi-signature systems manage the validation and storage of signatures outside of the blockchain. While they can provide security, the lack of visibility and the risk of centralization in external services can reduce transparency and increase vulnerability to certain attacks or errors. Transaction and signature information is not recorded on the blockchain, which can lead to trust and verification issues.

Multi-signature transaction process

The process of signing a transaction follows these basic steps:

Transaction creation: A user initiates the transaction by providing details such as the amount to be sent and the recipient’s address.
Signing the transaction: The transaction is sent to the other participants for signature. Each participant uses his or her private key to validate the transaction.
Collect signatures: The wallet collects the required signatures until the defined threshold is reached (e.g., 2 out of 3). If the required signatures are not reached, the transaction is not completed.
Blockchain confirmation: Once all required signatures have been collected, the transaction is sent to the blockchain and confirmed.

This process ensures that financial decisions are shared and monitored by multiple parties, making attacks much more difficult.

On a technical level, the transaction process in a multi-signature wallet follows a structure that can be represented in code in bitcoin’s smart contract language (script). Below is a simplified code snippet showing how a basic multi-signature transaction is implemented:

OP_2         # 2 signatures required
<PublicKey1> # Public key of signer 1
<PublicKey2> # Public key of signer 2
<PublicKey3> # Public key of signer 3
OP_3         # Total possible signers
OP_CHECKMULTISIG

This script defines a transaction that requires two of three possible signatures to approve a transaction, greatly increasing the security of funds.

Use cases, advantages and disadvantages of multi-signature wallets

These wallets have a variety of use cases and benefits that make them a solid option for securing digital assets. However, they also present certain operational challenges that must be considered.

Use cases

Two-factor authentication (2FA): By creating a wallet that requires at least two keys, a robust authentication mechanism can be established. For example, one key can be stored on a device and the other in another secure location, ensuring that only someone with access to both can authorize a transaction.
Escrow transactions: Multi-signature wallets are ideal for escrow arrangements, where funds remain blocked until both parties comply with agreed-upon terms. 2 out of 3 configurations allow for the inclusion of an “arbitrator” or mediator in the event of a dispute between buyer and seller.
Shared Custody in Corporations / DAOs: In organizations, especially companies or DAOs, it is essential that funds are not dependent on any one person. These wallets allow financial decisions to be approved by multiple members, ensuring transparency and security.
Lightning Network support: In the Bitcoin ecosystem, multi-signature transactions are critical to create payment channels on the Lightning Network, enabling fast off-chain transactions, reducing costs and improving scalability.
Decentralized Finance (DeFi): Allows trading, lending and deposits to occur without the need for intermediaries. This ensures that transactions are only executed when a minimum threshold of signatories agree.

Advantages

Elimination of single point of failure: Unlike single-signature wallets, where a compromised key puts all funds at risk, control in a multi-signature wallet is distributed among multiple signers. This reduces the ability of an attacker to compromise funds by requiring access to multiple keys.
Redundancy: With configurations such as 2 of 3 or 3 of 5, the loss or compromise of one key would not result in the total loss of funds. This provides an additional layer of security against incidents such as theft or loss.
Shared custody: These are ideal for groups or companies that need to share control of funds, minimize the risk of internal fraud, and ensure that decisions are made collectively.

Disadvantages

Advanced backup management: Each device or key has its own mnemonic recovery phrase. Storing all these phrases in one place negates security, so it is imperative to have secure locations for each backup.
More devices to secure: As the number of keys increases, more physical security is required to protect them. Concentrating devices in one location can create a point of vulnerability.
Complicated recovery: If a key is lost in a 2-out-of-3 configuration and the wallet software is unavailable, the remaining two keys will not be sufficient to restore the wallet without a backup configuration file. It is advisable to store this file with the key backups.
Inheritance of assets: Even if a very secure configuration is in place, assets can be lost if the knowledge of how to access the funds is not properly passed on to heirs. The risk of access instructions falling into the wrong hands is also a challenge to consider.
Inconvenience for frequent transactions: In setups where keys are kept in separate locations (e.g., one at home and one remotely), frequent transactions can be inconvenient and discourage regular use of the wallet.
Lack of standardization: There is no standard implementation of this technology across the various blockchains that support it. There are different implementations from different organizations, some of which are even closed source. In addition, there are risks associated with protocol changes in the underlying blockchain or DLT. Differences in implementation can lead to compatibility issues and an additional learning curve for users using different systems.
Higher transaction costs: Multi-signature transactions typically have higher costs than single-signature transactions. This is because multi-signature transactions require a greater amount of data and processing, which can result in higher fees, especially on blockchains with fees based on transaction size.
Limits on the number of co-signers: There is a practical limit to the number of co-signers possible in a multi-signature configuration. As the number increases, the complexity of the transaction and key management increases, which can lead to operational problems.
Complexity of changing schemes: Changing schemes in a multi-signature configuration, such as compromising one of the private keys in a 3-of-5 scheme, requires generating a new multi-signature address with new private keys. This requires obtaining at least 3 of the 5 keys, performing a transaction on the new address, and then restoring the keys to remote locations. This process can be complicated and error-prone if not handled correctly.

Important: Backup your seed

You must carefully plan your multi-signature system and securely backup/store all your recovery phrases, also known as “seed phrases” or passwords. These phrases are essential for recovering your funds in the event of loss or damage to your devices. In self-custodial wallets, the recovery phrases cannot be retrieved by third parties; no service has access to them or to your private keys. This means that if these phrases are lost, stolen, or destroyed, there is no way to recover your funds. Therefore, be sure to store your recovery phrases in separate, secure locations to avoid total loss of access to your digital assets.

MuSig2: The evolution of multi-signature in Bitcoin

MuSig2 is a protocol that improves multi-signature transactions on Bitcoin and compatible blockchains by optimizing both efficiency and privacy. This scheme is based on Schnorr signatures, which were introduced to Bitcoin with the Taproot update. The main advantage of MuSig2 is the ability to aggregate signatures into one, which reduces transaction size and improves both scalability and signer privacy.

Technical advantages of MuSig2

Schnorr signatures: MuSig2 benefits from Schnorr signatures, which were implemented in Bitcoin through the Taproot update. Schnorr signatures allow multiple signatures to be aggregated into a single signature, significantly reducing the size of multi-signature transactions. This not only lowers transaction costs, but also improves the scalability of the bitcoin blockchain.
Privacy: In traditional multi-signature, transactions reveal how many participants are involved. MuSig2, by aggregating all signatures into one, makes it impossible to distinguish a multi-signature transaction from a single-signature transaction on the blockchain. This greatly improves the privacy of participants.
Increased efficiency: MuSig2 optimizes the signing process, which reduces the interaction between participants during transaction creation. This solves one of the major drawbacks of traditional multi-signature, where all signers must interact multiple times to create the final transaction.
Improved security: Although the security of traditional multisignatures is already robust, MuSig2 improves this aspect by reducing the amount of information that participants need to share with each other, further reducing the risk of rogue key attacks.

MuSig2 compatibility

While MuSig2 was designed specifically for Bitcoin, Schnorr signatures are a widely accepted cryptographic scheme and could be implemented on other blockchains using Taproot or similar mechanisms.

Technical requirements: To implement MuSig2 on other blockchains, they must support the secp256k1 elliptic curve and implement Schnorr signatures.

Conclusion

Multi-signature wallets are one of the most secure tools available for protecting digital assets because they distribute responsibility among multiple signers, eliminating the risk of a single point of failure. Despite the challenges associated with them, such as increased complexity and additional cost, these wallets are proving to be essential for enterprises and power users managing large amounts of money.

The addition of MuSig2 and Schnorr signatures to Bitcoin represents a significant breakthrough, promising even more efficient, cost-effective and private transactions and setting a new standard for security in the cryptocurrency ecosystem.

In addition, it is very important for security that multi-signature schemes are implemented directly in the blockchain (on-chain) rather than off-chain. On-chain solutions, such as those used in Bitcoin, Ethereum and Litecoin, among others, provide greater transparency and security by recording all transactions and signatures on the blockchain.

Ethereum co-founder Vitalik Buterin has also stressed the importance of using multi-sig wallets to improve the security of digital assets. According to Buterin, an “M-of-N” system ensures that funds are always accessible and recommends that keys be distributed among trusted individuals without revealing their identities to each other to maintain the security of digital assets.

With all these benefits, multi-signature wallets not only stand out for their security robustness, but also present themselves as the recommended option for those seeking advanced protection for their digital funds.

In the next article, we will explore Multiparty Computation (MPC)-based wallets, a technology that takes collaborative security to the next level, enabling even stronger protection between participants.

Resources:
[1] CryptoBlogs – Multisig wallets
[2] IQ Wiki – Multi-signature wallet
[3] Bitcoin Magazine – What is a Multisignature wallet
[4] Foundation.xyz – Multisig – Is it for me?
[5] Unchained – Bitcoin Multisig 2-of-3 vs 3-of-5
[6] BIP327 – MuSig2 for BIP340-compatible Multi-Signatures

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