Multisig or multisignature is the requirement for a transaction which implies that more than a single key is needed before a transaction can be accepted. It is often used as a sort of secondary security protocol in case of a mishap, while also dividing the responsibility between more than one person when transacting with bitcoins.
You can think of multisig as a deposit box that has three keys. You hold the first key, the second key is held by your partner, and the last key is kept by your best friend. To open the box, you will need all three of these keys present.
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Multisig transactions are also called “M-of-N transactions.” The “M” stands for the number of signatures or keys required, while “N” refers to the number of signatures or keys in a given transaction.
Let’s get back to our example of a deposit box. Think of a multisig-protected Bitcoin account as a safe deposit box that comes with three keys. The customer gets one key, the bank keeps another, and a co-owner holds the third key. All three keys must be present to open the safe deposit box. Put back in the context of Bitcoin transactions, the safe deposit box example is a 3-of-3 multisig transaction.
What Are the Practical Uses of Multisig?
Let’s take a look at some of the most common applications of multisig:
Mutisig can serve as a guarantee in a trustless escrow transaction. It means that it can help ensure that both the buyer and the seller can safely exchange cash or items for Bitcoins or vice versa even if they do not know or trust each other.
Here is an example. Tom wants to purchase goods from Lauren. But, Tom is only willing to pay if the goods are satisfactorily delivered. Similarly, Lauren wants assurance that she will get paid for the goods. For the exchange to proceed, they can create a 2-of-2 multisig transaction. Tom puts the payment into the escrow account, and Lauren does the same. They have now agreed to a contract. When Lauren sends the goods to Tom and Tom finds them in good condition, he “signs” the contract and releases the money to Lauren. Lauren gets the payment and her money back by signing the contract.
If, however, Tom does not receive the item or it is not what he expected, he can negotiate with Lauren. The contract will keep their money until they agree. Either Tom finally confirms, or Lauren fully refunds him.
Private Key Protection
Mutisig can also be used to avoid problems caused by loss or theft of private keys. For instance, a person or company can lock any digital asset (word document, spreadsheet, audible content, etc.) or a wallet using a 2-of-3 multisig private key. Even if a hacker or a thief gets his/her hands on one of the private keys, he or she still won’t be able to access the asset using only one of the three keys.