An Introduction To Multisig

A Comprehensive Guide to Secure Bitcoin Storage with Multisignature

Understanding Multisig: Strengthening Bitcoin Security

Bitcoin’s security heavily relies on the protection of private keys (?). A single private key acts as the gateway to access and control your bitcoins. If an attacker gains access to your private key, they can steal all your bitcoins. Additionally, the loss or destruction of a private key can result in permanent loss of access to your bitcoins.

Multisignature addresses this vulnerability by spreading the risk across multiple keys. In a multisig setup, multiple Bitcoin addresses are combined into one multisignature address. To authorise a transaction, a signature from multiple private keys is required. The number of keys involved in the setup is denoted as N, and the number of keys required to sign a transaction is denoted as M. M-of-N is called the quorum (?) whereby M is the threshold (?). For example, a 2-of-3 setup requires three keys, with two keys needed to sign a transaction. The most common setups are 2-of-3 and 3-of-5, but various combinations are possible depending on the chosen software.

The primary advantage of multisig is its ability to protect bitcoins from theft and loss. In a 2-of-3 setup, even if one key is lost or stolen, the stored bitcoins remain secure. With a 3-of-5 setup, two keys can be lost without losing control over the bitcoins. If a key is lost or stolen, this key can be rotated out of the setup by signing with the remaining keys. By combining multisig with cold storage (?) and geographically diversified key storage, an exceptionally high level of security can be achieved. The easiest and most secure way to setup multisignature is with signing devices, where each private key will be created on a hardware device.

The Most Important Use Cases For Multisignature

The primary reason to use multisignature for Bitcoin security is to protect your bitcoins from theft and loss. By implementing multisig, you significantly mitigate the risks associated with a single point of failure, such as the loss or theft of a private key. Multisig also safeguards against online hacks, confiscation, hardware failure, supply chain attacks (?) and natural disasters.

Beyond security, there are other compelling reasons to utilise multisignature:

1. Financial Cooperation

Multisignature enables secure financial cooperation within businesses or between friends and family. In a business setting, a 2-of-3 multisig address can be created, with the CEO and two employees each holding a key. This setup allows the employees to sign transactions in the absence of the CEO, while preventing any single individual from stealing the funds.

Similarly, family and friends can utilise multisig to create shared accounts that require consensus for spending. This ensures that funds can only be spent when a predetermined number of members agree, preventing any individual from making unauthorised transactions. Multisig can also be used for creating bets or agreements. With a neutral entity holding a key to resolve disputes.

2. Non-Custodial Financial Services

Multisignature technology enables the replication of various financial services in a non-custodial (?) manner. Non-custodial services, like Hodlhodl and Unchained Capital, do not hold customer funds but instead rely on multisig setups to carry out their functions. This eliminates the need for extensive regulatory compliance, reduces the risk of massive hacks and prevents centralisation of power over the network.

Unchained Capital offers lending services that allow customers to retain partial ownership of their collateral, preventing rehypothecation. Hodlhodl on the other hand, operates as a peer-to-peer exchange, lending and escrow service. Holding only one of the three keys required to resolve disputes. These non-custodial services provide greater security and privacy while offering essential financial functionalities in the Bitcoin economy.

3. Bitcoin Inheritance

Multisig can be used to address the issue of Bitcoin inheritance. Traditional self-custody methods can result in the permanent loss of bitcoins when the holder passes away. However, with multisig a setup can be created where bitcoins can be inherited without compromising security.

For example, a 2-of-3 multisig setup can be established, with one key held by the owner, one key stored in a bank locker accessible only with a death certificate and one key shared with a family member. During the owner’s lifetime, the family member only has access to one key, which is insufficient to move the bitcoins. However, upon presenting a death certificate, the family member gains access to the second key and can claim the bitcoins. Existing features like Shamir’s secret sharing (?) and future features enabled by Taproot can make inheritance even better. It will also eliminate the need for trusted 3rd parties to be involved.

4. Secure Travel with Bitcoins

Travelling internationally with large amounts of cash can be risky, as it can lead to confiscation or legal complications. Multisignature provides a secure alternative for carrying bitcoins while traveling. By setting up a 2-of-3 multisig address and distributing the keys accordingly, you can travel without physically carrying any money. Each time you need to spend, you can sign with the key you have and a trusted third party can provide the second signature remotely. Even if your signing key is confiscated or lost during travel. You can recover your bitcoins upon returning home and accessing the key stored in a secure location.

The Anatomy of Multisig: How It Works

To understand the inner workings of multisignature, it is essential to grasp the process of creating a multisig address. The coordinator software plays a crucial role in this process by registering the required number of signers and generating a new address. This address is where bitcoins can be sent, and multiple private keys are needed to authorise a transaction.

To register a public key, the coordinator software imports the x-pub (?) or master public key and sets the derivation path (?). The derivation path ensures that the registered key can be identified and signed with. It is important to backup this information properly to facilitate the recovery of the multisig address.

To recover a multisig address, all the master public keys and derivation paths which are often combined in a wallet configuration file are required. It is advisable to store this information alongside your private keys. Ensuring that you always have access to the necessary components for recovery.

Steps to Set Up a Multisig Address

Setting up a multisig address requires careful consideration and planning. The following steps can serve as a comprehensive guide to assist you in this process:

1. Optimise for Privacy

Before diving into the setup process, prioritise privacy measures. Enhancing your privacy online is essential to protect your bitcoins. Implement various privacy-enhancing techniques and tools to minimise the risk of exposure. If nobody knows that you own Bitcoin, nobody will try to steal them!

2. Invest Time in Self-Education

Educate yourself thoroughly about multisig technology before proceeding with the setup. Multisig introduces complexity, and a solid understanding of the concepts and procedures involved is critical to avoid mistakes. Read extensively to gain a comprehensive understanding of multisig and its implementation. A good place to start is our multisignature guide. 

3. Determine The Quorum

Decide on the number of keys you will create and the number of keys required to sign a transaction. Consider factors such as the number of keys you can securely store, the software and hardware compatibility and the desired security level. The most widely used configurations are 2-of-3 and 3-of-5, but you can choose any setup that suits your specific needs.

4. Acquire the Necessary Hardware and Software

Select and download a multisig wallet that aligns with your requirements and buy the chosen signing devices to use as your signers. Be sure that all your singers are compatible with the chosen multisig wallet.

5. Organise Key Storage

Determine how and where you will store your keys. Options include renting vaults, relying on trusted family or friends, purchasing lockers or finding other secure hiding places. Remember that even adding one less secure key to a multisig setup is still more secure than not using multisig at all. As long as the insecure signers are not enough to sign for your threshold. 

6. Setup and Test

During the setup process, prioritise offline or Tor-based interactions whenever possible. Once the setup is complete, thoroughly test your multisig setup using small amounts of Bitcoin. Verify that you can successfully withdraw bitcoins from your multisig wallet and familiarise yourself with the necessary steps for future transactions. Before sending a significant amount of bitcoins to your multisig address. Double-check the address to ensure its accuracy.

The Best Tools for Multisignature Security

A wide range of tools is available to facilitate the setup of a multisignature address. By carefully selecting the appropriate tools, you can customise your setup to meet your specific needs. Consider the following categories of tools:

1. Privacy Tools

Prioritise tools that enhance your privacy while setting up and using multisig. Implement measures such as using Tor, VPNs, and privacy-focused wallets to minimise the risk of exposing your activities. 

2. Coordinator Software (Multisig Wallet)

Choose a coordinator software that aligns with your security requirements and offers the desired level of customisation. Furthermore, be sure that everything is compatible and that you can connect to the node or explorer you wish to use. 

3. Hardware for Key Generation

Select the appropriate hardware for generating private keys. You can compare the best hardware wallets for multisignature here.

4. Secure Key Storage Solutions

Carefully consider how you will securely store your keys. Explore options such as renting vaults, relying on trusted individuals or using secure physical storage devices like lockers or safes. Distribute your keys across multiple secure locations to minimise the risk of loss or theft. In an optimal secure multisig setup, keys are being distributed over several countries or even continents. 

Our Tips for Enhanced Security

To further enhance the security of your multisignature setup, consider the following tips:

1. Plan your yearly multisig upgrade around Black Friday to take advantage of significant discounts on hardware wallets.
2. Time your setup or upgrade with the renewal of your computer or phone to ensure you have a clean online machine.
3. Purchase hardware wallets directly from the manufacturer to reduce the risk of supply chain attacks. All devices in our comparison table will be ordered directly from the manufacturer.

By following these tips and implementing robust security measures, you can strengthen the protection of your bitcoins and ensure the long-term security of your assets.

In Conclusion

Multisignature technology provides a powerful tool for securing your bitcoins. By distributing the risk across multiple keys and leveraging advanced security measures, you can significantly mitigate the threat of theft and loss. Customising your multisig setup based on your unique needs and preferences allows for a tailored approach to Bitcoin security. By implementing best practices, leveraging the right tools and prioritising privacy and education, you can confidently store and manage your bitcoins with enhanced security and peace of mind.

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