A multi-signature (multi-sig) wallet in the world of banking and cryptocurrency is a type of digital wallet that requires multiple approvals, or “signatures,” before a transaction can be made. Here’s a simple breakdown of how it works:
Definition
- Multi-Sig Wallet: A digital wallet that requires more than one signature to authorize a transaction. This is different from a standard wallet, which requires just one signature (usually the wallet owner’s).
How It Works
- Setup: The wallet is created with specified rules for how many signatures are needed. For example, a 2-of-3 wallet means any two out of three designated people must approve a transaction.
- Signatures: These are not physical signatures like on a paper check. Instead, they are digital approvals, each one typically tied to a unique private key held by each user.
Examples of Transactions
- Deposit: Anyone can deposit into the wallet, just like a regular wallet. No multi-signature is required for deposits.
- Withdrawal/Transfer:
- Initiation: One user initiates a transaction, say, to send cryptocurrency to another address.
- Approval: Other designated users must then provide their digital signature (approval).
- Execution: Once the required number of signatures is reached, the transaction is processed.
Benefits
- Security: It’s harder for unauthorized users to access funds, as they would need multiple keys.
- Checks and Balances: Prevents a single user from unilaterally making transactions, which can be useful in organizations or group settings.
Example Scenario
Imagine a charity organization with a 3-of-5 wallet:
- The wallet needs three approvals out of five possible approvers (like board members) for any spending.
- When a withdrawal is needed, one member initiates a transaction to transfer funds to a vendor.
- Two other members review and approve the transaction with their digital signatures.
- Once three signatures are obtained, the transaction is automatically executed.
This is a simplified explanation, but it covers the basic concept and mechanics of a multi-sig wallet. The digital signatures are cryptographic proofs that the correct authorized persons have approved the transaction.
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This page was last updated on December 20, 2023.
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