Multi-signature structures have been around for a while and are securing billions of euros in digital assets. But how do they work? And what are the main differences with a simple single-signature structure?
In this article we will discuss what multi-signature structures are, the use cases of multi-signature structures, and how multi-signature structures work.
What is a multi-signature structure?
In essence, a multi-signature structure is a key security feature employed within the blockchain ecosystem to ensure that specific actions require the approval and cooperation of multiple parties before they can be executed. Unlike signatures in the physical world, signatures on a blockchain are performed using digital keys belonging to a certain party.
Instead of relying on a single digital signature, a multi-signature structure mandates that a predefined number of authorised signatures need to happen before a transaction can be executed.
It is important to note that in certain cases a multi-signature structure may also refer to a structure in which an action may require only one signature but has multiple parties that can authorise this action.
Why multi-signature structures are essential
But why would anyone use a multi-signature structure in the first place? The answer is simple: security. In a digital ecosystem in which certain actions can not be undone, it is crucial that the integrity and security of these transactions is guaranteed. A multi-signature structure adds an additional security layer to the blockchain ecosystem and addresses some of the security risks of single-signature structures.
Security risks of single-signature structures
Single-signature structures, where a single key holder can perform certain actions, are susceptible to various security risks and challenges, such as:
- Single point of failure: A single compromised key, whether due to theft, hacking, or human error, can lead to unauthorised access and the loss of digital assets. High-profile hacks and cryptocurrency thefts, such as the infamous Mt. Gox hack in 2014, have often resulted from this single point of failure, putting significant amounts of wealth at risk.
- Lack of accountability: In a single-signature system, the responsibility and accountability for transactions and decisions rest solely on the key holder. This setup can lead to abuse of power, lack of transparency, and difficulties in tracing fraudulent or unauthorised activities.
- Loss of keys: The loss of a single private key can result in permanent loss of access to digital assets, which is a common and irreversible issue in the cryptocurrency space. A multi-signature structure can help prevent this while also increasing security.
Use cases of multi-signature structures
As is clear from the above, single-signature structures are simple and convenient but can carry significant security risks. Multi-signature structures can address some of these risks in the following ways in various domains:
- Secure transactions: Multi-signature structures in wallets, accounts, or smart contracts are used to secure cryptocurrency transactions, requiring the approval of multiple key holders. This approach significantly reduces the risk of unauthorised or fraudulent transactions.
- Governance: In corporate environments, multi-signature structures can ensure checks and balances by requiring multiple key holders to approve important actions like financial transactions, board resolutions, or contract agreements. Furthermore, they can be useful for any decentralised multi-party decision-making, such as in DAOs or for blockchain governance.
- Escrow services: Multi-signature escrow accounts keep financial transactions safe, especially in complex deals. Funds are only released when certain conditions are met. Several key holders must agree, ensuring that the deal terms are followed. This adds an extra layer of security and trust in financial transactions, reducing the chances of disputes and fraud.
- Custody services: Cryptocurrency custodians and exchanges use multi-signature structures to protect customer assets from threats, including insiders and hackers. With multi-signature wallets, access to assets is controlled by a group of key holders (and often third parties for added security). This makes it tough for a single person to access or manipulate the assets without approval.
- Legal and compliance: Multi-signature structures are important for legal and compliance processes in the digital world. They ensure that multiple parties must agree on actions like signing contracts or complying with regulations. This reduces legal risks and makes sure these procedures are done correctly. Multi-signature structures promote transparency and security in legal and regulatory matters.
- Emergency recovery: Multi-signature wallets can act as an emergency recovery mechanism, allowing access to digital assets in case of the loss of one key holder, enhancing the security of digital holdings.
Why is blockchain needed?
However, why wouldn’t you use more traditional signature-collection methods? In comparison to traditional methods like multiple Docusign signatures, blockchain offers distinct advantages, particularly in transparency, execution speed, and versatility. Docusign, while efficient for collecting signatures, lacks transparency and doesn’t tie actions directly to signing. It merely signifies approval without immediate execution.
Contrastingly, blockchain’s strength lies in its inherent transparency; each approval is linked to an immediate and irreversible execution of the proposed action. Whether it’s a transaction or a governance proposal, blockchain ensures swift and transparent execution, fostering trust among parties involved. Moreover, Docusign doesn’t provide flexibility in assigning different weights or thresholds for signing. Blockchain, on the other hand, offers versatile permission settings, enabling the establishment of varying levels of authorization. This flexibility extends beyond simple signature collection, making blockchain an invaluable tool for diverse transactional and governance needs within enterprises and across various industries.
How multi-signature structures work
Multi-signature structures can be created in multiple ways, such as via account systems, smart contracts, and wallets. While the set-up process for each of these ways can differ, these multi-signature structures all function in a similar way. In order to explain how multi-signature structures work, we will explain multi-signature structures using an account system that can be found on popular blockchains such as EOS, WAX, and XPR.
Understanding account systems
Unlike blockchains like Bitcoin or Ripple which use a single keypair for all transactions, an account system has two different permissions. Permissions can be seen as requirements that need to be fulfilled in order for a transaction to go through. Each permission has certain actions associated with it. A default account has 2 native permissions, namely:
- Owner: Shows ownership of the account and is needed to make any changes to the ownership of the account.
- Active: Used for transferring funds, voting for validators, and making other high-level account changes.
Each permission has one or more key(s) associated with it. Each key associated with a permission has a certain weight, and each permission has a certain weight threshold which needs to be met before a transaction requiring that permission is accepted. This is how an account system works.
The default structure for these accounts is always a single signature structure. But what does that mean?
As can be seen in the image above, the owner permission has a default threshold of 1, and 1 key with a weight of 1 associated with it. The same goes for the active permission which has a default threshold of 1, and 1 key with a weight of 1 associated with it. This means that only the (private) key associated with the owner or active permission is required to perform any transaction requiring the owner or active permission, respectively.
In essence, similar to a Bitcoin address, only 1 signature is required to perform any action on this account. This is a single-signature structure.
Multi-signature accounts function similarly to default accounts, the main difference between the two is the permissions structure. In a default account all permissions have a threshold of 1 and only have 1 key with a weight of 1 associated with it, whereas the permissions in a multi-signature account have a threshold of 2 or higher and have multiple keys or permissions of other accounts with (possibly) varying weights associated with them. This also means that multiple keys or account permissions will have to sign any transaction from the multi-signature account.
An example of a possible permissions structure in a multi-signature account can be seen in the image above. Just like the default account described earlier, this account has both the owner and active permission.
However, the owner permission in this multi-signature account has a threshold of 3 and has 3 keys associated with it: The active key from John’s account, which has a weight of 2, the active key from Bob’s account, which has a weight of 1 and the active key from Stacy’s account, which also has a weight of 1. This means that to execute any transaction requiring the owner permission, both John’s active key and either Bob’s or Stacy’s active key would have to sign the transaction before it can be executed.
The active permission in this multi-signature account has a threshold of 2 and has 3 keys associated with it. The active key from John’s account, which has a weight of 1, the active key from Bob’s account, which has a weight of 1 and the active key from Stacy’s account, which also has a weight of 1. This means that to execute any transaction requiring the active permission (any combination) of 2 of the active keys would have to sign the transaction before it can be executed.
Multi-signature structures like these can be configured in any way, with as many participants as needed, for any goal, ranging from security to governance.
Lastly, it is important to note that in these account systems, or smart contracts, custom permissions can be created for certain actions, such as voting, staking, etc. In order to keep the other permissions separate and secure.
Getting started with multi-signature structures
Setting up multi-signature structures on your own can be tricky. At Zaisan we help you get started with this. Using the right tool, we help you create, manage, and implement multi-signature structures without all the confusing stuff. With Zaisan, you don’t need to stress about handling keys or keeping track of transactions. By making everything smooth and straightforward, you can feel confident using multi-signature structures for safer transactions and better governance, whether you’re an individual or a business.
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