Multisig wallets are smart contract-based wallets that require the approval of multiple parties before executing transactions. They are important for enhancing security and establishing control over digital assets. With multi-signature wallets, a single party cannot make unilateral decisions on a treasury without the participation of other designated individuals.

Since Web 3.0 is famous for its anonymity and decentralisation, there was a need for a solution that protects group-owned funds from single points of failure. Multisig wallets became the alternative that can reduce the risks of theft and unauthorised access by ensuring that multiple parties vet transactions before approval. This provides a higher level of control and optimises the governance process to foster distributed ownership.

It is noteworthy that multisig wallets allow for high levels of customizability, tailoring the use case to the specific needs of the instance. Users can set the number of required signatures for transaction approval or establish the hierarchy of permissions before a transaction can be processed. Because all activities on a multisig wallet can be viewed on the blockchain, they ensure accountability and transparency among participants, providing auditability in the decision-making processes.

How do they work?

Multisig wallets work through a “m-of-n” signatures mechanism. This implies that for a transaction to be processed on the wallet, “m” out of “n” designated signatories have to approve it. “n” is the total number of signatories while “m” is the minimum number of signatories required for the transaction.

The higher the “n”, the more secure and distributed the wallet becomes. “m” can range from one to the total number of signatories, “n,” but in theory, a wallet requiring just one signatory may not pass as truly multisig. The wallets utilise smart contracts to enforce multiple signature schemes and they are coded to provide an extra layer of security.

Use cases

Multisig wallets are widely used by individuals and businesses in various ways as outlined below:

1) Collaborative projects: Businesses, organisations, and nonprofits can use multisig wallets to ensure that every spending passes through a consensus process, ensuring that group funds are safe from theft, fraud or unauthorised access.

2) Personal security: Individuals who want to add an extra layer of security to their assets can bring multiple trusted peers in a multisig to avoid asset loss.

3) Escrow services: In solutions where there are middle parties between buyers and sellers, multisig wallets can be handy in ensuring fool-proof release of funds.

Advantages and disadvantages

As earlier emphasised, multisig wallet solutions have numerous advantages:

1) Accountability: Multisig wallets allow for accountability and transparency in the spending process because of the multiple approvals involved.

2) Security: The risk of asset loss or unauthorised transactions is greatly reduced because of the use of multisig wallets.

3) Backup and recovery: Since multisig wallets require multiple signatories, situations where a single party mishandles or misplaces their private key into the wallet will not lead to a total asset loss.

However, there are disadvantages we need to be aware of:

1) Coordination: Transactions may take longer when different signatories have conflicting schedules or are in different time zones.

2) Complexity: Since multiple parties are involved, setting up and managing multisig wallets may be complex and time-consuming.

3) Compromisation: In instances where one or more signatories are unresponsive or compromised, transactions may be difficult to execute.

How to use a multisig wallet

There are different multisig wallet solutions out there like Gnosis Safe and Argent Wallet. To use them, the process follows typical steps that are outlined below:

1) A developer deploys a smart contract specifying the number of required signatures (m) and the designated signatories (n).

2) Then, funds are deposited into the wallet’s smart contract address.

3) When a transaction needs to be executed, one of the signatories creates a transaction proposal, specifying the recipient address, amount, and any additional data.

4) The signatories (n) then review and either approve or reject the transaction proposal.

5) Once the required number of approvals (m) is reached, the smart contract executes the transaction automatically, transferring the funds to the specified recipient.