Introduction to Multi-Signature Transactions

Bitcoin currency is based on a few fundamental principles and beliefs. They are full transparency, decentralization and putting an individual in charge of the money.

Full transparency means that the bitcoin network contains information about all transactions that have occurred on the network since its inception in 2009. The history of transactions is saved in a block of the blockchain. Because of the way the blockchain works, transactions are impossible to edit after they are added to the blockchain. You can see the information about transactions at https://blockchain.info/ . For example, the address  https://blockchain.info/block/000000000000000000c8749d3a4a396103940cd4dd98cd0a5aad5d4d8495413b has information about block #494469 of the blockchain. The block has information about 1956 transactions and you can see the information by scrolling down the page.

Decentralization means that there is no single point of authority or control that issues bitcoins or processes transactions. Everything on the network is done by the members of the network. Bitcoin does not have a CEO, a president or a governing board. The inception of the network occurred right after the financial crisis of 2008, during which many of the governments were engaging is quantitative easing, which, in plain terms, is printing more money. When there is more money, the money that people have is worth less. This is why bitcoin creators didn’t want to have any one entity deciding to issue more money.

Finally, putting an individual in charge of his or her funds means that any person can get a bitcoin wallet for free and start using the currency. However, things can get more complicated when a family or a company needs to use a single wallet.

With a regular bitcoin wallet, a user has the private key of a wallet and is fully in charge of the wallet. In the past, if two or more people needed to have access to the funds, there was only one option available to them. This option was to trust one of the users with the private key of a mutual wallet. Obviously, this option comes with a lot of risks. An individual may decide to cash out the wallet and others would not be able to do anything about it because bitcoin has no central authority, no customer support and no place that can reverse a transaction. On bitcoin network, once a transaction goes through and is confirmed, it is irreversible even if one of the parties was a scammer or an attacker. Needless to say, having one person in charge of a wallet where multiple people keep their funds is a less than optimal solution.

For this reason, many of the software developers started creating solutions that would allow multiple users to share the same wallet. Eventually, a multi-signature system came to life. In this system, multiple users control the same wallet with no single user being able to send funds without getting consent from at least one other person with shared control of the wallet. Such an account is known as multi-signature (or multi-sig) account.

A multi-sig account is different from a regular wallet in that it has multiple private keys.

Receiving a transaction with a multi-sig wallet works identically to receiving a transaction on a regular wallet. A multi-signature wallet comes with an unlimited number of addresses that its owners can generate. Once they provide a sender with an address, the sender can send funds to the address of the wallet. However, the multi-signature wallet does look differently when users want to send the funds out. Every transaction requires multiple signatures. The number of signatures depends on the total number of keys in the wallet. For example, in a wallet with three keys at least two people would need to sign an outgoing transaction for the transaction to occur.

If the parties fail to sign the transaction, it will not even leave the wallet. For this reason, multi-signature wallets are a great solution for businesses, families, and organizations where more than one person makes financial decisions. If you take your bitcoin security very seriously, you may consider getting a multi-sig wallet even if it’s just for your personal use.

Armory was the first creator of bitcoin wallets with multi-signature functionality. You can see the products that the company offers today at https://www.bitcoinarmory.com/ .

Add a Comment