Multi-signature wallets (also known as multi-sig) prevent single points failure by requiring several private keys for transactions, rather than relying solely on one key. How they improve security and decentralization is as follows:
1. Eliminating the Single Point of Compromise
- If a hacker has access to the private keys of a wallet with a single signature, they are able to control all funds.
- Multi-signature wallets require multiple approvals, e.g. 2 of the 3 keys. This makes it harder for an attack to be successful.
2. Protecting Against Lost and Stolen Keys
- The user can still retrieve their wallet if they lose one of the keys.
- In a 2-of-3 configuration, for example, losing one key will not result in the loss of all access.
3. How to combat fraud and insider threats
- Businesses and organizations may distribute keys to multiple trusted parties.
- The funds cannot be transferred by a single employee without the consent of all key holders.
4. Increased security for high-value transactions
- Multi-signature wallets require multiple approvals for large transactions, preventing unauthorised withdrawals.
- This can be useful for decentralized autonomous organizations (DAOs) and crypto exchanges.
5. Resistant to Phishing and Malware attacks
- Even if a single key is compromised (for example, by phishing), attackers will not be able to access the wallet unless they have additional keys.
- Multi-signature wallets are now significantly more resistant to cyber attacks.
6. Smart Contracts: Trustless Custody
- Multi-signature wallets are used frequently in Decentralized Finance (DeFi) to provide a trustless escrow system and for joint account management.
- Users can enforce rules regarding how funds are used without having to rely on a central authority.
Conclusion
Multi-signature wallets reduce risks of key loss, fraud and insider threat by distributing control over multiple keys. They are therefore a popular security measure among individuals, businesses and organizations that manage large crypto holdings.
Read: What happens if two people generate the same private key?