What Are Multi-signature Wallets And What Are They For?

What Are Multi-signature Wallets And What Are They For?

As a general rule, Bitcoin transactions require the signature of one of the parties (the issuer) in order for the funds to change ownership.

Even if it is the simplest way, there are occasions when requiring the signature of several parties can be much more useful and secure.

What Are Multi-signature Wallets And What Are They For
Multi-signature Wallets.

These transactions are called “multi-signature transactions” or “multi-signature” and can become the solution to many problems that currently occur in Bitcoin world.

  1. Uses
  2. Other Uses
  3. How do I create a multi-signature wallet?

In a very short and well-known way, the holder of a certain amount of bitcoins must sign a transaction by which he transfers the possession of those bitcoins to another user. This transfer of ownership contract is publicly recorded in the blockchain and cannot be modified after its issuance.

This is the conventional and most used method, however, there is another possibility that it is two or more parties that must sign the contract of transfer of ownership.

Although it is not used as much as it should be, it could avoid many headaches to those users who “own” bitcoins in some exchange house. It also opens the door to other uses that increase security at the level of merchant and even simple user.

The popularization of wallets that facilitate multi-signature transactions makes it convenient to know how these transactions can help us in our daily lives.

Depending on the objective we have, we can create wallets that need all or just some of the firms. For example, 2 of the 2 signatures, 2 of the 3 signatures or any combination we can think of.

1. Uses

1.1 For merchants. Wallet 2 of 3

What Are Multi-signature Wallets And What Are They For
Multi-signature Wallets.

Focused primarily on online sales, merchants would benefit from showing honesty in their store by creating multi-signature transfers through an intermediary arbitrator.

In this case a three-party multi-signature transaction could be created where one of the parties is the same merchant, one of the parties is the buyer, and a third party is an intermediary.

At the time of purchase, the seller will be able to verify that the buyer has made the transfer to the multi-signature wallet and thus send the order.

Once sent, he can sign the transfer of the multi-signature wallet to his own wallet. Once the buyer has received the order according to the purchase conditions, he can sign the transfer of ownership of bitcoins from the multi-signature wallet to the seller’s wallet.

In the event that the buyer is not satisfied with the purchase, the intermediary of the arbitrator would be requested, who may sign the transaction back to the buyer or seller, at his discretion.

1.2 For exchange houses. Wallet 2 of 2

To our regret, there have been too many exchange houses that have allegedly been pirated and their funds stolen.

With current technology it is impossible to integrate the buying and selling of bitcoins in real time in the blockchain.

The first are transactions that can occur in tenths of a second, while Bitcoin blocks are confirmed in an average of 10 minutes. For these internal transfers the exchange resort to changes in the registration of their own databases.

In this way only those transfers that go out of the exchange house system are the ones that are registered in the blockchain. And these are the ones that are susceptible to big robberies.

Although not infallible, if the main wallets of the exchange were multi-signature, the probability of succeeding in stealing them could decrease dramatically.

1.3 For small groups

What Are Multi-signature Wallets And What Are They For
Multi-signature Wallets.

The uses of multi-signature wallets are restricted by the user’s imagination. There are occasions when a small group of friends want to create a fund for a holiday, a purchase for a party, a bet, and so on.

In this case the friends could sign the transaction of their bitcoins towards a multi-signature account controlled by all and, once the purchase has been made or the bet settled, sign all the final transaction.

1.4 For the security of a single user. Wallet 2 of 3

Although the above applications make a lot of sense, perhaps the best use we can make of multi-signature wallets at the single-user level is in our own security.

This method is based on the control of the three keys by a single user but using different devices.

Imagine sending funds to a multi-signature address with 3 parts: one of them is your telephone wallet; another of the parts is your computer; another is a paper wallet.

If we specify that in order to carry out a transaction from that wallet at least 2 of the 3 parties must sign the transaction, even if our computer or telephone are pirated, they will never be able to carry out a transaction without the support of the other party.

The paper wallet will support you if you cannot access either of the other two parties.

2. Other Uses

Although we have commented on those that may be more common, other transactions can be created such as 2-out-2 for couple expenses, 2-out-3 for the expenses of a child approved by one of the parents, 3-out-5 as a simple majority of a council for business expenses, and so on.

3. And how do I create a multi-signature wallet?

What Are Multi-signature Wallets And What Are They For
Multi-signature Wallets.

Wallets as popular as Electrum or Armory and services like Coinbase offer multi-signature wallet creation.

However, the recent release of Copay has been the trigger to facilitate the creation of multi-signature wallets by the current user.

With versions for Windows, Mac, iOS, Android, Linux and Windows Phone, Copay is the easiest way to make sure our funds are safe. However, we must remember that as in any good Bitcoin wallet, we must make backups at any step. With Bitcoin we are our own bank and responsible for all our actions.

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