There are several approaches to protecting private keys, and in the coming weeks we will explore the most common and advanced technologies that help users manage their funds efficiently and securely.
This first article focuses on single-signature wallets, one of the simplest forms of escrow. In the next article, we will explore HD wallets (Hierarchical Deterministic Wallets), which use a hierarchical derivation system to generate multiple private keys from a single seed, improving key organization and management.
We will then look at multi-signature wallets, a more advanced option that distributes control among multiple signers, providing greater security. Finally, we will conclude with Multiparty Computation (MPC) wallets, which allow multiple signers to collaborate without revealing private keys, providing a robust and secure solution for digital asset management.
Throughout this series of articles, we will analyze the different solutions to provide a clear picture of which is most appropriate in different contexts.
What is a single-signature wallet?
Single-signature or singlesig wallets are one of the most basic and widely used methods of cryptocurrency custody. These wallets require only a single signature to authorize transactions, making them an accessible and simple option for individual users. However, this simplicity comes with its own set of challenges and risks, especially when it comes to security.
While this type of wallet is popular with users due to its ease of use, speed of transactions and simplicity of key management, as we further explore its operation and risks, it is important to recognize the security limitations inherent in this model.
Advantages of these wallet
The main advantage of single-signature wallets is their speed and simplicity, and transaction costs tend to be lower than more complex wallets such as multi-signature wallets because there is only one signature involved.
They are ideal for:
- Users who make micropayments or quick payments.
- Those looking for a simple setup without added complexity.
- Situations where speed is of the essence, such as fast payments.
Disadvantages and risks: The big problem of the single point of failure
Despite their simplicity, they have a significant inherent risk: the single point of failure. This means that if the private key is lost, stolen, or destroyed, access to funds can be lost forever, which is one of the major drawbacks of this type of storage system.
Single-signature wallets mainly use the ECDSA (Elliptic Curve Digital Signature Algorithm) digital signature algorithm for transaction authorization. This method, based on elliptic curve cryptography, is the most widely used in various blockchains due to its resource efficiency and strong security. However, it is important to note that there are alternatives such as EdDSA (Edwards-Curve Digital Signature Algorithm), RSA (Rivest-Shamir-Adleman), DSA (Digital Signature Algorithm), and Schnorr signatures, among others. Each of these algorithms offers different characteristics in terms of security, efficiency and applicability in different blockchain contexts.
- Vulnerability to theft: If someone has access to the private key, they can transfer the funds without any additional restrictions. This is a major risk when private keys are stored on Internet-connected devices (hot wallets) or even in cold storage (cold wallets) if not properly managed.
- Loss of the private key: If the owner of the private key loses it or accidentally destroys it, there is no way to recover the funds. In many tragic stories in the cryptocurrency world, people have lost large amounts of bitcoin simply because they forgot their passwords or lost access to their private keys stored on misplaced hard drives.
- Inability to delegate: Access to funds cannot be securely shared among multiple people. In a corporate environment, this becomes a problem because anyone with access to the key has full control over the funds, increasing the risk of misappropriation or human error.
The limited applicability of these wallets
Single-signature wallets are better suited for individual users, not groups or companies that need to conduct large transactions or manage funds collaboratively. The inability to securely distribute access to funds among multiple people makes them unsuitable for organizations that require greater security and redundancy.
For those who need to store large amounts of cryptocurrency, they are a sub-optimal solution due to the aforementioned risks. In these cases, multi-signature wallets or advanced solutions such as MPC are more advisable, as they provide more robust protection by eliminating the risk of a single point of failure.
Partial solutions
There are options that attempt to mitigate some of the associated risks, although none of these strategies completely eliminate the vulnerability of a single point of failure, they can reduce the impact of key loss or unauthorized access, such as:
- BIP 39 and recovery phrases: The BIP 39 standard introduces the use of mnemonic phrases to create and secure a private key. A recovery phrase is a sequence of 12, 18, or 24 words that can be used to recover a wallet if the private key is lost or the device on which it is stored fails.
- Seed XOR: A technique used to split the seed of a private key into multiple pieces (usually two) so that none of the pieces alone can reconstruct the entire key. This process improves security by requiring both parties to restore access to the wallet.
- Shamir’s Secret Sharing (SSS): The Shamir’s Secret Sharing (SSS) protocol is a cryptographic technique that allows a private key to be divided into multiple fragments (or “shares”) so that only a subset of these fragments can be used to encrypt or decrypt the key.
- Hardware wallets (physical wallets): Hardware wallets are physical devices that store private keys offline. Although they are compatible with the single-signature scheme, the security of a hardware wallet lies in the fact that the private key is never directly exposed to an Internet-connected device, dramatically reducing the possibility that an attacker can steal it through malware or network attacks.
- Encrypting the keys: Another common technique is to store the private key of a single-signature wallet in an encrypted format, protected by a strong passphrase or password.
- Multi-factor authentication (MFA): Implementing a multi-factor authentication system can provide an additional layer of security by requiring a second form of verification before granting access or signing transactions.
- Secure backups: Maintaining backup copies of private keys in secure physical and digital locations can help prevent loss due to hardware failure or attack.
However, while these tools can reduce risk, they do not completely eliminate the problem of a single point of failure at the time a transaction is signed, which remains a critical vulnerability.
Conclusion: Is a single-signature wallet right for you?
Single-signature wallets are a quick and easy option for those who need immediate access to funds and do not store large amounts of cryptocurrency. As such, they are particularly useful for small, quick transactions where simplicity is key. However, for any individual or business looking to store large amounts of cryptocurrency, this option carries significant risk.
The lack of additional security or backup mechanisms and the vulnerability to loss or theft of the private key make single-signature wallets less secure than other solutions available on the market, but with good practices we do not need to worry, although it never hurts to explore the option of multi-signature wallets.
In the next article, we will take a closer look at HD wallets (Hierarchical Deterministic Wallets), which utilize a hierarchical derivation system to generate multiple private keys from a single seed. These wallets enhance the organization and management of keys while maintaining security and ease of use. Don’t miss it!
Resources:
[1] Unchained: Singlesig vs multisig
[2] Learnmeabitcoin – Technical keys signature
At Block&Capital, we strive to create an environment where growth and success are accessible to all. If you’re ready to take your career to the next level, we encourage you to join us.
Last posts
