What is Multi-Sig?

The term ‘multi-sig’ is shorthand for the phrase ‘multi-signature transaction’. It refers to transactions on the Bitcoin network, or other cryptocurrency networks, which must be ‘signed’ by more than one person in order to be valid.

Digital currencies like Bitcoin use public key cryptography. In this system you can ‘create an account’ on the network by generating a pair of keys – a public key and a private key. The public key acts like an address which be shared with others and used to receive coins. The private key, or ‘secret key’ is kept by the owner of that address (or more often their wallet software). When a user wants to spend some of their coins they (or their wallet software) must use their private key to ‘sign’ a transaction, in order to prove that they own that account.

A multi-sig address is a special kind of public key address, supported by Bitcoin and some alt coins, which has more than one private key. It is possible to start off with public key addresses belonging to different people, and then create a multi-sig address which must be signed by the private keys paired with those addresses. This means that you can create an address which no individual person can spend money from, but which instead requires every signer to agree before a payment can be made.

This is called an ‘n of m’ multi-signature transaction. This name refers to the fact that a certain number (n) of a group of members (m) must sign for a payment to be made. For example, you may require 2 out of 3 signatures, or even 6 out of 10.

How To Use Multi-Sig For Escrow

One of the most common uses for this technology is to add an extra level of security to escrow transactions. When two people who do not know each other, and therefore can’t trust each other, wish to do business they may use a trusted third party as an ‘escrow agent’. This agent takes payment from the buyer, keeps hold of it until the product or service is delivered, and then releases it to the seller if everything is ok, or makes a judgement on whether a payment or a refund should be made if there is a disagreement.

This leaves the buyer and seller open to an exit scam, in which the escrow agent simply disappears with the money themselves. A ‘2 of 3’ multi-sig address can be used to prevent that from happening. The buyer is then able to make payment to this address – if both buyer and seller agree then they can provide the 2 signatures necessary to transfer the money from the escrow address to the seller. If they do not then the escrow agent, who holds the third key, must choose to either sign a transaction refunding the buyer or a different transaction making payment to the seller. Crucially, however, the escrow agent cannot take the coins themselves unless the buyer or seller conspires with them to do so.

For a more complete guide please see our article: How To Create and Use a Multi-Sig Bitcoin Address

Multi-Sig Exchanges

One of the best use-cases for this technology is for exchange websites. By getting rid of the need to send coins to a central address controlled by an exchange operator the risk of loses those coins to hacking (eg bter or mintpal) or theft / fraud (eg mt gox) users are affording a much safer and more secure experience.

The most widely used multi-sig exchange service is provided by Multi-Signa

Alternative Systems

Bitshares uses something called ‘dynamic account permissions’, which it claims to be more flexible than Bitcoin’s multi-sig and to address some of its limitations. Within this system pending transactions can be creating which require a certain level of authority weighting in order to be valid. This authority can come from a certain group of accounts, each of which may have a different level of authority which it is able to pass on. At any time up until a payment is made, the owners of these accounts may choose to approve, withhold their approval, or to cancel approval which they have previously given.

Learn more about dynamic account permissions here: https://bitshares.org/technology/dynamic-account-permissions/

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