Run the Numbers #06: What is Bitcoin Multisig?

Bitcoin & Data Science

2020.10.09

Lately in the Bitcoin space there has been a lot of buzz around Multisig. This post attempts to explain what it is, why it is beneficial, and take a look at the clear trend towards wider adoption of this technology.

Multisig stands for Multi-Signature, where two or more private keys are used in some combination to spend Bitcoin. Multisig can be set up in numerous ways, some of which require only one of many keys to sign, while others require all the keys to sign a transaction. For personal use, the most common setup is a 2 of 3 scheme, where the user has three keys and must sign the transaction with any 2 of them. This is a good way to protect against loss of a key, which is the most common way in which Bitcoins are lost or made unspendable.

In a business setting, Multisig can be used in interesting ways to give employees or executives shared power to spend from the company treasury. For instance, perhaps the CEO’s key and at least four other keys are needed to spend, or alternatively any 9 keys together can spend. As you can see, the complexity starts to rise very quickly, which is the main (only?) argument against the use of Multisig in comparison to single signature wallets.

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Image from unchained-capital.com

“Multisignature addresses allow individuals and businesses to set up customized key and lock schemes to fit their needs, such as 2-of-3 (2 out of 3 keys are needed to move funds), 3-of-5, or any combination of M-of-N. By creating an M-of-N in which M is greater than one, multiple keys are required to facilitate any valid bitcoin transaction and no individual key represents a single point of failure. Separately, a 2-of-3 address allows users to include a third-party in a quorum, whether a company such as Unchained Capital or a family member, while still controlling a majority of the keys needed to move funds.” — Unchained Capital Blog

Though the total number of Multisig addresses are still a small fraction of all Bitcoin addresses, the trend has been steadily increasing over time, as we can see.

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Data from coinmetrics.io

Multisig is not for everyone, but it is a powerful tool that should be considered by any Bitcoin holder — both for individuals and businesses alike.