Multi Signature Wallet

Publication Date :

19 Jun, 2025

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Table of Contents

What Is A Multi Signature Wallet?

Multi signature wallet, or multisig wallet, is a wallet that requires multiple signatures (or keys) to execute a transaction or make transfers. The primary purpose of this vault is to enhance the security and privacy levels by installing multiple private keys.

Unlike single-key wallets, there are addresses involved here. In addition, these vaults use smart contract technology. They add a second layer of security to the transactions executed. However, if either of the keys is absent, these transactions will halt at the moment.

Key Takeaways

Multisignature wallets are vaults with multiple owners and private keys. If they use their keys, the transaction can be executed.
The other members also receive a private key from the original user. The purpose of this key is to sign the transaction executed by the other user.
Based on the approval required, there are different types of multisig vaults. It includes 1-of-2, 2-of-2, 3-of-5, and custodial wallets.
In addition, they also receive a unique recovery phrase for backup purposes. However, if the phrase loses, the transactions will pause.

How Does Multi Signature Wallet Work?

Multi signature wallet is applicable in the crypto industry, where two or more private keys are used as a password to execute the transaction. Here, multiple users receive private keys at the signing-up stage. These keys are master public keys as they exist only in multisig wallets. So, as users confirm to join, they digitally sign the transaction using the keys assigned. Unless they use their allotted keys, the transaction will not occur. Therefore, the use of every key at certain stages is very crucial.

The mechanism of the crypto multi sig wallet is similar to a safe vault in a bank. Customers owning a locker must have the key and password; even crypto users own multiple keys. However, only the wallet members or parties involved can access these keys. No anonymous person can insert a digital signature into it. They are also known as copayers, who act as co-owners of the wallet. These individuals can view the transactions in the multi signature wallet ledger. In addition, they also receive a unique recovery code that acts beneficial during disasters. But, if any of the copayers lose this code, they cannot sign the transaction.

Applying it is practical in the crypto ecosystem and among large organizations. Individuals who desire to make cryptocurrency transfers use these wallets. It avoids the threat of malicious actors within the process. Also, many organizations use the ledger to get management executives' approval (or sign). Moreover, much usage is visible in the real estate sector, where private keys are distributed among the beneficiaries. As a result, the decedent's assets can be accessed through these keys.

Types

Depending on the number of keys, various types of multi-signature wallets are available on the blockchain. Let us look at them:

#1 - 1-of-2 Wallets

It is one of the basic setups of multisig wallets. Here, two private keys are allotted to the wallet. So, as the transaction initiates, either of the users (one out of two) can sign it. In short, there is no need for all users to sign the transaction.

#2 - 2-of-2 Wallets

2-of-2 wallets are two separate wallets on different operating machines. For example, one wallet can be on a mobile and another on a laptop. Thus, users who wish to access the funds must provide two digital signatures at checkout. However, both wallets have the same multi-signature wallet address. They depend on the two-factor (2A) authentication factor.

#3 - 2-of-3 Multisig Wallets

As the name suggests, these wallets allow transactions that consist of two out of three keys. Here, the most minor requirement to proceed with the transaction is two signatures. They provide security and are compatible with hot wallets and escrow transactions.

In contrast to the above types, other multisig wallets differ in the signatures involved. For instance, a few wallets may require 3-of-5 signatures to authorize a transaction. Likewise, individuals can decide the number of keys needed for a transaction.

How To Set Up?

Let us look at the steps on how to set up a wallet on a blockchain platform:

Set up the hardware wallets: The foremost step is to set up hardware wallets for the multisig vaults. These wallets create a space for the development of the latter. Thus, users must first clean the devices like laptops and computers from viruses or bugs. Once clean, they can follow the prompts and set up the hardware wallets on the concerned device.
Download the wallet app on the device: After setting up tricky wallets, users can select vaults from the best multi signature wallets and download them. However, the wallet features must align with the number of signature approvals.
Decide the Configuration details: The next step is to decide on the number of private keys or the type of multisig wallet. The users can also set up the unique recovery phrase, number of participants, and address. It enables restricted access to limited individuals to ensure advanced security.
Create a Wallet: Finally, the users can name the wallet and add funds to the wallet. They can make a trial transaction by entering the recipient's address and amount. Later, the copayers can add their digital signature, and the original sender can review and confirm the transaction.

Examples

Let us understand some examples to comprehend the concept in a better way:

Example #1

Suppose ABC Ltd is a firm engaged in the industrial sector. They have four local and seven global offices for their operations. In addition, the corporation consists of five boards of directors that reside in different locations. As a result, the risk of hackers constantly threatens the management of dividend matters. Thus, the firm decides to use the multi signature wallet for such concerns. So, when the management wanted the approval of each director, different private keys were provided to them. They could easily access the wallet, view the dividend amount, confirm the transaction, and proceed. As a result, the misuse of funds was reduced.

In this case, the BOD of ABC Ltd could review the corporate matters despite residing in different regions. However, if either of them lost the private key (password), it might be challenging to access the funds. Hence, their participation in management decisions will be hampered.

Example #2

Instadapp's latest addition to its product lineup, Avocado Multisig, represents a significant advancement in the realm of multisignature wallets. Designed as a multi-chain multisig wallet, Avocado aims to cater to a diverse range of users, from individual crypto enthusiasts to large financial institutions. Its standout feature lies in its ability to utilize a single address across more than ten different blockchain networks, consolidating treasuries onto a unified platform. This innovative approach contrasts with traditional multisig wallets, which typically require separate addresses for each chain.

Avocado's Account Abstraction functionality integrates Ethereum smart contract features into its user interface, further enhancing its utility and security. Notably, the wallet's "gas tank" feature allows vital holders to collectively cover gas costs across all supported chains, a significant improvement over conventional multisig setups. With Instadapp's total value locked (TVL) reaching approximately $1.95 billion, Avocado Multisig emerges as a notable player in the decentralized finance (DeFi) landscape, offering enhanced security and operational flexibility to its users.

Advantages And Disadvantages

Although multi signature wallets have enormous benefits for organizations, it has equal disadvantages. So, let us look at them:

Advantages	Disadvantages
As keys can be stored anywhere and with anyone, there is limited dependency on a device or individual.	If a copayer loses its key, the other users cannot execute the transaction or make transfers.
The security issues are reduced, and privacy is enhanced with these wallets. It enables two-factor authentication for signatures.	There is no legal custodian to control the funds in most wallets.
The risk associated with hackers is reduced as multiple signatures are required to execute the transaction.	Theft of recovery phrases makes it difficult for the transaction to proceed.
It has major usage in escrow transactions as a third party reviews and confirms it before the transfer occurs.	The transaction speed is comparatively slower due to the involvement of factors like wallet type, location, and others.
There is greater transparency as co-owners can view the transaction details and funds history.