What is Multi-Signature (Multi-Sig)?

A multi-signature (also known as multi-sig) is an additional layer of security that involves the use of more than one key to authorize a transaction. This security layer is used with cryptocurrency wallets.

To really understand how it works, let’s take a look at a single signature crypto wallet that only requires one signature. When you want to send money from your wallet, you must sign a transaction and by doing that, you are stating that you are the owner of the money in question and that you approve the transaction.

Multi-signature crypto wallet, on the other hand, requires more than one signature to confirm the transaction which means that there is also more than one owner. Though there can be some flexibility with that. Let’s say that nine people authorize a multi-sig wallet but only seven signatures are needed to confirm a transaction.

All of the co-owners of the multi-sig wallet can see the funds and transactions happening in it. Each of the co-owner gets their own unique recovery phrase (or seed phrase). However, if one of them loses that phrase, there is a potential that there won’t be enough co-owners to sign a transaction to transfer the funds. Therefore, the recovery phrase adds to the security aspect but results in a higher level of risk if it’s lost.

Gerald Cotten, the former CEO of the now-defunct Canadian exchange QuadrigaCX, is an illustration of why multi-signature wallets can be effective. He died in India, supposedly from Crohn's disease complications, and the company's cash was lost forever because he was the only one with access to the crypto wallet. It wouldn't be the case if he had a multi-signature wallet.