Choosing a crypto wallet is one of the most important decisions for investors in a crypto exchange or for anyone holding a large amount of assets. Multi-signature wallets are often discussed as the best and most trustworthy option.
In this article, we’ll present the downsides of using multi-sig wallets because there are some that the users should be aware of. This isn’t to say that users shouldn’t invest in multi-signature wallets since there are use cases that suit them best. It’s, however, essential for crypto users to be informed about the potential threats and problems.
What are Multisig Wallets?
A multi-sig (short for multi-signature) wallet is a type of cryptocurrency wallet that requires more than one private key to authorize a transaction. It’s a more secure tool for storing and transmitting crypto assets than the alternatives. Users that want to learn crypto, should especially focus on studying the security features built into standard crypto tools.
Common use cases for multi-sig wallets include joint accounts, escrow services, and security for large amounts of cryptocurrency. They are also used in decentralized autonomous organizations (DAOs) for collective decision-making.
Complex Set Up
Setting up a multi-signature wallet is more complex than a single-signature one. It requires more IT knowledge and more coordination between the parties involved. The additional hustle is worth the extra security you get, but it may drive some of the less tech-savvy users away.
Cryptocurrencies have become common and used by small-time investors as well as the general public. This means there’s more need for security and that the average user is no longer an IT expert. However, there are also plenty of resources online that can guide investors through the initial setup.
Coordinating the Parties
Transactions made from a multi-sig wallet need to be approved by all parties, which is what makes it safer. It slows down the transaction process and can even prevent transactions if they are time-sensitive. Decision-making also depends on all parties using their codes and can be stopped if one of the parties isn’t available at the right time.
As is the case with almost all features on our list – it can be considered a feature or a downside depending on what the investor expects from a wallet and how they use it.
Risk of Losing the Keys
Since the wallet uses more than any key and relies on more than one party, there’s more of a chance for the keys to get lost. It can happen through a breach of security or by accident. Keeping the keys on a device that’s not connected to the internet can help with hacking, but nothing prevents human error.
Since the users need all the keys to make a transaction, losing one can pose a big problem for all parties. It’s a bulletproof safety measure, and investors can get locked out of their wallets if just one of the parties isn’t able to enter their keys.
More Surface to Attack
Using multiple keys provides more security, but it also provides more potential venues for a hack attack. Each of the keys and each of the users can be a target of attack individually, providing hackers with more chances to get to your keys and assets.
The attackers can do some damage if they get to the majority of the keys individually, but they can’t access it and make transactions without every key. It’s important, therefore, for all the key holders to be aware of potential security breaches.
Cost
Due to their increased complexity and size, some blockchain networks charge higher transaction fees for multi-sig transactions. Multisig transactions typically include more data than single-signature transactions. Each additional signature and public key increases the overall size of the transaction. Bitcoin bases its transaction cost on the size of the data that’s being transmitted.
Implementation costs stack up when blockchain networks employ software solutions and services needed to make transactions and provide safety. There are also costs of consultation and support that multiply when it comes to using multi-sig wallets. For users that hold and transmit small amounts only, these costs can bite into the value of their assets.
Compatibility Issues
Not all wallet software and services support multi-sig functionality. However, the most popular wallets out there, such as Electrum, Armory, and some hardware wallets, do support it. Different standards and implementations exist for multisig wallets, such as Bitcoin’s BIP-0110 or Ethereum’s EIP-1137. This, too, can lead to compatibility issues.
There may also be issues arising from the integration with third-party services. This may include crypto exchanges since not all of them support the use of multi-sig wallets. For developers, integrating multi-sig functionality into custom applications can be challenging. This is due to various blockchain services’ limitations of APIs and SDKs.
Maintenance Efforts
Setup and maintenance efforts are more complicated for multi-signature wallets than for single-signature ones. Users need to define the number of keys required to authorize a transaction. They also need to configure the software so that multiple parties can use it.
It’s also necessary to keep the software regularly updated. Users need to monitor their wallets for updates and download the latest ones as soon as they are available. Regular security audits are also essential to ensure the multi-sig wallets remain safe.
Regulatory Challenges
The collaborative nature of multisig wallets can complicate the legal ownership and responsibility of funds. Multisig wallets often involve multiple parties. Ensuring compliance with KYC and AML regulations can be challenging. Each of the parties needs to collaborate on their identity. That’s especially complicated if the parties aren’t based in the same country.
Some countries have regulatory bodies that require the transactions made to and from multi-sig wallets to be tracked and monitored. Complying with regulations across borders can be challenging, making the wallets unusable until all parties comply with the regulations in their own countries. The regulations will become even stricter and more complex with more cryptocurrency users.
Backup and Recovery
Backing up and recovering data from a multi-sig wallet can also be technically challenging and too complex for some users. All of the processes we’ve mentioned, including these, require all the parties to have access to their keys, which can cause confusion and delays.
The recovery process for a multi-signature wallet is more intricate than for a single-signature wallet. It involves multiple steps that need to be executed in the right order, as well as coordination among parties. Recovery is an essential part of the security process, and users should take the time to learn how to complete it before they actually need it.
Conclusion
While multisig wallets offer a robust security framework ideal for various use cases, their complexity and potential challenges cannot be overlooked. From the intricate setup and maintenance to the need for coordination among multiple parties, users must be prepared for the additional efforts required.
Potential risks include losing keys and increased attack surfaces. There’s also the higher cost, which highlights the importance of understanding the full scope of using multi-sig wallets. Multi-sig wallets are a powerful tool for safeguarding crypto assets. The users just need to learn to navigate the complexities of this tool. Informed decision-making is a key part of that process.
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