BackPack Educational Blog Post – What is Multisig, How To It Works & To Setup One

Source: https://learn.backpack.exchange/articles/how-to-multisig-crypto

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What is multisig?

Multisig wallet security is one of the most secure methods for storing crypto assets and interacting with the blockchain.

The name is short for ‘multi signature’ which is a method for securing crypto assets with multiple layers of security.

Multisig requires multiple crypto wallet signatures to authorize a transaction, ensuring that no single wallet holder can authorize transactions independently. This method enhances security by distributing control across multiple devices.

Multisig helps protect against attacks as it ensures that no single wallet holder can authorize transactions independently. You must have all private keys in order to sign.

‍Multisig requires more technical knowledge to set up and use however the added security benefits provide significant value for those with complex security needs (such as corporate treasuries or hyper security conscious individuals).

‍The most common multisig strategy is called ‘2-of-3 multisig‘ which involves two separate cold storage hardware wallets and one hot wallet.

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Who uses multisig?

‍Multisig is often used by three main groups. This level of protection requires more technical knowledge to set up and use, however, the added security benefits provide significant value for those with complex security needs.

‍Institutional Investors: Where multiple parties need to approve transactions.

• High Net-Worth Individuals: To add an extra layer of security to their crypto holdings.
• Security-Minded Users: For those who want the highest level of security for their assets.

Benefits of Multisig:

‍There are multiple benefits to multisig, which makes this technique one of the industry standards for institutional grade security.

‍Enhanced Security: If one key is compromised, the attacker still needs another key to perform any transactions, significantly reducing the risk of unauthorized access.

‍Redundancy: If one key is lost or inaccessible, the other two keys can still authorize transactions. This provides a safety net against the loss or theft of a single key.

‍‍Fraud Prevention: Requiring multiple approvals makes it more difficult for fraudulent transactions to occur, as it requires collusion between multiple parties.

What is the difference between cold storage hardware wallets and hot wallets?

‍Cold storage hardware wallets are physical devices which hold digital assets and are often ‘air gapped’ from the internet.

‍Air gapped means that the device is completely isolated from network connections including Wi-Fi, Bluetooth and USB.

• They boast numerous security functions which prevent physical attack vectors.

‍Hot wallets are software based apps accessed via web browser or on mobile and are designed to directly interact with blockchain products.

• Users typically utilize hot wallets to send and receive assets as well as sign transactions in web3 dApps.
• Hot wallets such as Backpack Wallet offer extended native functions such as token swaps, multichain token bridging, token staking and access to different blockchain networks.

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What is 2-of-3 multsig?

‍2-of-3 multisig is the most common deployment where users only need 2 private keys and 3 public keys in order to access the assets and sign transaction.

‍Authorized user(s) must hold the private keys for each individual wallet involved in the multisig.

‍There are two common configurations for 2-of-3 multisig:

• Two cold storage hardware wallets and one hot wallet
• Three cold storage hardware wallets

‍For both of these configurations, two of the three designated wallets must approve a transaction before assets can be viewed or interacted with.

‍Multiple wallets and transactions must be successfully interacted with to access assets.

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What is 3-of-3 multisig?

‍3-of-3 multisig is the second most common deployment where users need 3 private keys and 3 public keys in order to access the assets and sign transactions.

‍3-of-3 multisig requires all three designated keys to approve a transaction. This means that every transaction must be signed by three separate wallets.

‍Requiring approvals from each wallet designated during multisig setup is the key difference between 3-of-3 and 2-of-3.

‍There are two common configurations for 3-of-3 multisig:

• Two cold storage hardware wallets and one hot wallet
• Three cold storage hardware wallets

‍This setup ensures maximum security, an attacker would need to compromise all three hardware wallets to access the crypto assets.

‍Backpack Wallet users can utilize a combination of Ledger, Trezor and Keystone to set up 3-of-3 protection for their crypto assets. Backpack Wallet is the only Solana wallet to support multi-sig protection across the world’s most trusted cold storage hardware providers. Just hook them up to Backpack Wallet and make your crypto experience more secure and seamless than ever.

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What are the risks of using multisig protection?

‍Multisig security setups are one of the most effective methods of protecting digital assets such as crypto and NFTs.

‍Multisig security is complex to configure and manage.

• It requires a high level of technical knowledge and losing private keys will make it difficult or impossible to access digital assets.
• If you lose just one private key in a 3-of-3 protection then you will lose access.

How do I use multisig protection on Solana?

Backpack Wallet can be used to enable 2-of-3 and 3-of-3 multisig protection in a variety of ways including:

‍Creating multiple hot wallets in Backpack

• Connecting cold storage hardware wallets to Backpack
• Using a combination of Backpack hot wallets and cold storage hardware wallets

‍There are numerous reputable cold storage hardware wallets which support Solana (SVM) tokens such as:

• Ledger
• Trezor
• Keystone

‍Functionally this means that a user will import cold storage hardware wallets into Backpack and then connect Backpack to the multisig creation platform.

‍Backpack is integrated with several notable Solana multisig wallet platforms, two in particular manage a vast majority of multisig protected funds:

• Squads
• Realms

The platforms completely manage multisig setup including determining number of signers, entering approvers wallet address and setting up a secure vault.

‍After a multisig account is set up, management of the assets requires using the platform and connecting the appropriate wallets to approve transactions.

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Hardware Wallet Best Practices

‍There are several cold storage hardware wallet best practices to follow which increases the security of your digital assets.

‍Always purchase hardware wallet directly from manufacturers website or official stores on Amazon and other online marketplaces

• Update firmware of hardware wallet before initiating any transactions
• Test hardware wallet connections with small amount of crypto before sending full amounts
• Initiate recovery process before sending full amounts of crypto
• Store recovery information in secured location
• Store local password information in separate secured location

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Frequently Asked Questions About Multisig

‍What does ‘multisig’ mean?

• Multisig is a short for ‘multi signature’ which is a method for securing crypto assets with multiple layers of security.

What does 2-of-3 multisig mean?

• 2-of-3 multisig protection involves using two separate hardware wallets which require two separate approvals to access assets or approve transactions.

What does 3-of-3 multisig mean?

• 3-of-3 multisig protection involves using three separate hardware wallets which require three separate approvals to access assets or approve transactions.

What does ‘xpub’ mean?

• xpub, short for ‘extended public key’ is a Bitcoin network term. It is a function that allows users to create multiple public keys for a single seed phrase.
• It is most often used to create multiple addresses for receiving assets or interacting with public dApps.

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