What's a Multisig?
Elementary explanation of multi-signature wallets and their importance.
Each and every crypto wallet, whether browser or hardware, has its own set of private keys. Whenever you send crypto from your wallet, a transaction is created and signed by that wallet’s corresponding private keys. Most crypto wallets are secured only by one set of private keys, meaning they are beholden to a single point of failure: the secure storage of these private keys.
Thanks to the invention of the multisig, it is now possible to require approval from multiple private keys in order to transact. Multisig configurations are commonly known as requiring m out of n signatures, where m is the number of private keys required to approve a transaction and n is the total amount of private keys necessary to control the multisig wallet. For example, you can have a 2/3 multisig where approval from two out of the three signatures associated with the multisig are required to move funds. You can think of a multisig as a co-owned bank vault that needs multiple keys to open. You can then think of your browser, hardware, or IOS wallets as the keys that can open the vault. Multisigs mainly enhance two key features of crypto: security and co-ownership.
As previously stated, crypto wallets are beholden to a single point of failure: one set of private keys. If these private keys are phished, stolen, or misplaced you can lose access to your crypto forever. Multisigs, on the other hand, are protected by multiple private keys. This increases the attack vector necessary for hackers to steal your crypto, thus making multisigs inherently more secure than any other type of crypto wallet.
There's an anticipated NFT mint coming up that both Bob and Alice want to participate in.
Bob holds his entire net worth on his Phantom browser wallet, the same wallet he will mint from.
Alice holds only the crypto necessary to purchase the NFT on her Phantom, with the rest of her crypto stored on a 2/3 multisig.
The morning of mint, the project's Discord is hacked and a phishing link is distributed that mirrors the actual minting site. After pressing on this link and approving the transaction, hackers obtain the wallet's private keys and thus drain the wallet. Both Bob and Alice fall for this trick and have their Phantom's compromised.
Since Bob kept his entire net worth in a browser wallet secured by only one set of private keys, in just a moment, all of his crypto was gone. Meanwhile, since Alice kept the majority of her crypto in a 2/3 multisig, the hacker was unable to access her savings. While the hacker successfully obtained 1/3 (one-out-of-three) keys associated with the multisig, he still needs to obtain one more key to execute transactions. Alice still has access to the remaining two keys on the multisig, so she has the ability to execute transactions and move her funds to a new multisig where zero keys are compromised.
Before multisigs, the only way to co-own crypto was to share seed phrases (private keys) of a wallet, so all parties have equal and full control of that wallet. When each party has access to the one seed phrase, the attack vector for hackers to infiltrate the wallet multiplies by each person who possesses the seed phrase. Also, each person that has complete control over the wallet can execute transactions without the approval of the other people who "co-own" the wallet, thus increasing the risk of a bad actor stealing funds from the wallet.
Multisigs solve this problem by giving each person on the multisig "voting power" to initiate transactions, but not complete power over the wallet to execute transactions. If there are 3 people on a 2/3 multisig, no one person can execute a transaction on their own, they need approval from one additional party. Thus, democracy is introduced to asset ownership.