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Introduction
Most people have learned about cryptocurrencies and how they can make monetary systems more efficient. Unlike paper currencies, cryptocurrencies are only present in a digital form; therefore, their users need to use services like digital wallets to store and manage them.
There are many types of digital wallets available in the market, and it can be a challenge to learn about their features and uses. This article is going to discuss various types of digital wallets and share details about the utility and requirements for Multisig Wallets.
What is a Digital Wallet?
A digital wallet is a product and service that users can utilize to manage, use, and store their cryptocurrencies or other digital assets. Most people today use digital wallet applications on their phones for making online payments. Digital wallets are the digital alternatives of the real wallets that people use to store their paper currencies.
Since the introduction of the internet and the boom of eCommerce websites in the 90s, many developers have been working on introducing services related to digital services to facilitate online payments. Digital wallets are custodial applications where users can store their digital or fiat currencies.
How do Digital Wallets Work?
Digital wallets are also software. The mobile applications and other online services that offer digital payment options are affiliated with banks and other financial institutions to keep a record of the digital wallets that are available at the disposal of the users.
Users can register a new account and pass through the authentication process. It is just like a bank account but much more accessible. The users are authorized to protect their digital wallet accounts using passwords or other security measures.
Once the account has been set up and verified, the users can send and receive money through them. Users can also connect their digital wallet accounts with compatible online platforms to make transactions at their discretion.
Origin of Digital Wallet
One of the earliest commercial launches of digital wallets was done was Coca-Cola in 1997. The project is considered one of the first real renditions of digital wallets and considering the online payment services such as VISA, MasterCard, and Bank wires, it is not a surprise. Later Paypal officially introduced digital escrow accounts in 2000. eCommerce giant Alibaba introduced Alipay in 2003 and M-Pesa in Kenya in 2007.
Other big tech companies, such as Google, introduced their digital payments platform called Google Pay in 2011. In 2013, Google integrated Google Pay services with Gmail enabling ATM compatibility and a dedicated mobile application.
Today some of the biggest tech enterprises, such as Apple, Samsung, and Facebook, have issued their personalized digital wallet options.
Many countries are also heavily invested in switching from paper currencies to digital fiat and issuing state-sanctioned digital wallets that are backed by financial regulators and register users based on citizen identifications.
Types of Digital Wallets
Before learning about Multisig wallets, the reader should learn about the various types of digital wallets given as under:
Cold Wallets
Cold Wallets are digital wallets that can contain the digital reserves of their users away from internet access. It means that the users are not storing their funds on a private server or the cloud.
The users can use dedicated hardware or another device to store their digital reserves away from any other access point. There are two basic types of Cold Wallets:
Hardware Wallets
These wallets are in the form of a USB stick or a dedicated crypto hardware wallet. The users can transfer all their funds to these devices and take them out of any possible access point. Some digital wallets offer the option of internet connectivity, but users can turn them off or on based on their personal preferences.
Paper Wallets
Paper wallets are another method of storing digital reserves out of the reach of internet access. This technology makes use of a QR Code. The code is often printable or downloadable. There are some paper wallets where users can generate a unique access code offline as well.
The information can be saved on a piece of paper, but they have some flaws, such as no partial payment options, which make them risky to use.
Hot Wallets
Hot Wallets are digital wallets that are active software. These wallets are connected to the internet and are more prone to security threats. There are following basic types of Hot Wallets.
Desktop Wallets
These wallets are downloadable software on personal computer operating systems such as Windows and Macintosh etc.
Mobile Wallets
These are available in the form of mobile applications and can be used on the go for easier and faster accessibility.
Web Wallets
These wallets are available on websites and offer the option to register accounts online and gain access from anywhere in the world.
Browser Wallets
These Wallets are available as extensions for different browsers such as Chrome and Firefox etc. Users can keep an eye on all the latest developments on their digital wallet accounts by keeping their notifications on when they are working online.
Custodial and Non-Custodial Wallets
Custodial wallets are digital currency wallets where the service providers hold the private key, and they are responsible for keeping the funds of the account holders safe. Non-Custodial Wallets are digital accounts where users are in full control and possess both private and public keys.
Single and Multisig Wallets
Singlesig wallets require only one signature to secure the account, while Multisig wallets need several signatures.
What is a Mutlisig Wallet?
As mentioned before, Multisig wallet is a term made from two words; the first is multiple, and the other is signatures. It means that it is a type of digital wallet that contains more than one digital signature. It is crucial to understand that digital wallets are just like bank accounts.
To understand a Multisig Wallet, imagine a bank account that requires more than one password to access or use its contents. It means that Mutlisig Wallets can need two or more signatures or codes to unlock them and grant access to their reserves.
These wallets have been operational since 2013, and they are known to increase the security level for their users. There are cases where one digital wallet is co-owned by more than one owner. In such cases, every owner can get a unique code generated to protect a multisig wallet.
When the users wish to access the account, they have to ensure that everyone agrees and provides their part of the code to use the account for making deposits, withdrawals, or any other changes.
One owner can also use Multisig wallets to increase their security level. In some cases, the users can access the wallet by providing two out of three codes or signatures to log in to the Multisig wallet account.
How does a Multisig Wallet Work?
It is crucial to mention that all crypto wallets require a private and public key combination to secure user accounts. The Public key is like a bank account number that can be shared with the public as an address or specified digital destination.
Meanwhile, the private key is the secret pin or code that is only used by the owner to verify the proprietorship of the said account. Mutlisig wallets issue more than one private key for a single digital wallet address.
The user of the account has the option to issue as many private keys as they want using a Multisig Wallet. It means that the account holder can also issue a unique private key for every single transaction they make to ensure higher security.
However, the account holder must keep a detailed record of all of their private keys to be able to log in to their accounts. The users can choose to align the pending transactions in any order once they have logged in. A transaction cannot be completed and will not expire until the correct private key is input into the system.
Types of Multisig Wallets
Here are some important classifications of Multisig Wallets:
2-of-2 Multisig Wallet
These wallets generate two private keys, and they need both for login authorization. In most cases, this type of Multisig Wallet is protected through two-factor authentication. The users are bound to keep both private keys at separate locations or on different devices. Unless both private keys are entered, the user cannot access their account, making it more secure.
2-of-3 Multisig Wallet
This type of wallet issues three unique private keys. It is used to increase the security level of a hot wallet. The first private key is kept on the active online platform, such as an exchange. The second private key owns the user in the form of a paper wallet or anywhere else on cold storage.
The third wallet is sent to the main services provider as a backup. The account holder needs to enter two out of these three private keys to gain access, and in case they lose one of their private keys, they can contact the service provider for backup.
1-of-2 Multisig Wallet
This type of Multisig wallet also issues two private keys for one account but needs only one for authentication. People who wish to open shared accounts can use this feature. It also makes access to a single account independent for two users without needing the approval of the other since it only needs one private key input to create the signature.
Advantages of Multisig Wallets
Here are some of the most useful benefits of Multisig wallets:
Extra Security
The direct and most visible benefit of a Multisig wallet is that it makes a typical digital wallet account more secure. When it comes to digital currencies and online transactions, there is always a massive threat of hacks and technical exploits.
In case a custodial digital wallet services provider goes down, they can also siphon off the funds of the account holders. Meanwhile, the users are bound to forget, lose, or compromise one private key to scammers or other threat actors.
With Multisig accounts, the users have more than one private key meaning they are better equipped to protect their accounts and safeguard their passcodes.
Two-Factor Authentication
Anyone who has a smartphone has heard about the two-factor verification method. Multisig Wallets also make use of the two-factor or 2FA authentication method. In case, a hacker ends up breaking into your account; the owner can block the alien access and block the invasion.
There is also the option of storing extra private keys in secret locations or handing them over to other users for safekeeping or shared account privileges. The account will only authorize the transactions and logins that are verified by the correct and required number of private keys.
Account Ownership
Banks offer the option of opening joint accounts for users. In the same way, Multisig wallets offer their users the facility to co-own a digital wallet. The group of owners can possess each private key and make decisions based on voting.
It means that several business owners can come together and use a multisig wallet as a corporate account to build trust and ensure cooperative operations. In this manner, the owners can have the confidence that only after voting and reaching a consensus the business funds can be utilized.
Escrow Transactions
Escrow accounts are where the two parties agree to reserve funds until the transfer of products or services is verified. Multisig wallets offer an option to perform Escrow transactions for digital currency users. The user needs 2 out of 3 private keys to access the funds.
The payer can deposit the required funds in the wallet, and once the other party has performed their part of the bargain, they can authenticate the transaction to go forward. It means that both parties can view the transaction during the contract terms are carried out.
Limitations of Multisig Wallet
Here are some of the most talked about downsides of Multisig wallets:
Transaction Speed
Multisig wallets are just as fast and efficient as any other digital wallets. However, in case the other owners who own the other private keys delay or go missing, these transactions can take a lot of time to process.
There are some cases where the owners are unable to reach a consensus regarding a new transaction, and so they can experience a massive delay in a transaction on account of pending authentication.
Technical Understanding
There are several ways to use and operate a multisig wallet. In some cases, these wallets come with a joint custody option with a private company such as a cryptocurrency exchange, etc.
Therefore, the average cryptocurrency investor and digital wallet user need to undergo a little training or conduct some research to learn to operate them properly.
Financial Scams
In most cases, the passwords for the Multisig wallets are shared with other individuals or corporations. It can expose a person to considerable security threats. If only owner of a Multisig wallet turns malicious or goes missing, everyone can lose their funds.
Susceptible to Misplacement
Keeping track of one private key is challenging enough. Multisig wallet issues a set of several private keys. The owner of the wallets needs to ensure that they have stored all private keys in a secure location.
Private keys are long lines of random digits, words, and symbols. It is almost impossible to commit them to memory like a regular password. They are difficult to manage, and if one out of all owners of a Multisig accounts somehow losses their private key, everyone can be locked out of their reserves forever.
Comparison Between Singlesig Wallets and Multisig Wallets
Most digital wallets only issue one private key and require one signature for login and approval. However, more users have started to switch to Multisig wallets on account of the increasing incidents of hack attacks.
Many major cryptocurrency corporations in the world also depend on Multisig wallets to secure their corporate funds and safeguard the funds of their clients. There are both similarities and differences between both types of wallets.
Singlesig wallets are easier to handle and use, while their counterpart is somewhat difficult to manage and operate. On the other hand, the basic operational mechanism and design of both wallets are very much the same.
The transaction speed for both singlesig and multisig wallets is the same unless there is a delay on account of private key authentication. Singlesig wallets are ideal for personalized use, while Multisig wallets are more suited for enterprise adoption.
The former offers simple and complete control over the funds, while the latter distributes the ownership rights.
Conclusion
Multisig wallets ensure the best security protection and also incorporate many exclusive features to digital wallets without making them very complicated. The users can benefit from this type of wallet by learning about its benefits.
On the other hand, the user can also take preventive measures to avoid the risks that are associated with Multisig wallets for the best experience.
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