When choosing a crypto wallet, individuals and companies alike need to first assess the level of risk they’re comfortable with. For those that demand the highest security, two of the best technologies available are a hardware wallet and/or a multi-signature wallet.
A hardware wallet is a dedicated physical device that keeps a user’s private key or recovery seed offline at all times in what we call cold storage, while a multisig wallet requires a number of different private keys to access funds.
Why not combine them though? In this article, I’ll cover the basics of multisig wallets and how you supercharge your wallet security by using CoolWallet’s convenient cold storage with Gnosis Safe’s leading multi-sig wallet technology.
What is a multi-signature wallet?
Multi-signature wallets, or multisig wallets, are a type of cryptocurrency wallets which require more than one private key to sign an outgoing transaction. This type of wallet applies multisig technology that allows multiple unique signatures to sign a document as a group. It’s especially useful for financial institutions and companies where access to funds cannot be centralized and limited to one person.
For example, in 2019 Canadian exchange Quadriga CX’s founder mysteriously died in India, taking $200 million in user funds with him to the grave as no one had access to any private keys. This could have been avoided if the exchange used a multisig wallet.
How does a multisig wallet work?
multisig enhances wallet security by distributing private keys to various locations, while allowing multiple keys to sign a transaction makes your wallet more usable.
Let’s imagine a secure locker with two locks and two keys held by two users. The locker can only be opened if both users provide their keys, so one cannot open the locker without the consent of the other. The multisig mechanism functions like the secure locker. The digital assets stored on a multi-signature address can only be accessed by using two or more signatures according to the way a multisig address is configured, for example, 2-of-3, which means that only 2 signatures are sufficient to access the stored assets of a 3-signature address.
Why are multisig wallets important for crypto security?
This multisig design adds an additional layer of security to digital assets by preventing those problems caused by the loss or theft of a private key. Even if one of the private keys used for multisig wallet is exposed to phishing attacks or malware infections, the hacker can only have access to a single key and the assets remain safe.
Of course, there are more dangerous threats in crypto than hacks or scams. In terms of security, all crypto wallets are susceptible to one specific vulnerability exploit,the so-called “$5 wrench attack”, in which the wallet owner is coerced through physical violence or blackmail to reveal the private key or recovery seed.
Having a multisig wallet mitigates the risk that comes with this single point of failure, as any potential attackers will have to gain access to the keys of various holders.
Who should use a multisig wallet?
For organizations, especially DAOs and NFT teams, a multisig wallet can be used as a decentralized decision-making tool to manage their funds. Having a multisig wallet allows multiple members to have access to the DAO wallet. Each signer can use a completely separate wallet address and the mechanism maintains custody of their private keys. Once the wallet infrastructure is in place, the governance on making decisions will be set accordingly.
For instance, in a 6-member board of directors each board member holds a key. A 4-of-6 multisig wallet can ensure every outgoing transaction is agreed by the majority and protect the funds from misusing by any individual.
For a DAO, multiple people can have access to the wallet so that transactions require more than one person’s approval. This is typically called multisig transactions. Ethereum doesn’t have multisig built into the protocol so you need to either code it yourself in smart contracts or use a product that implements the smart contracts for you.
For individual users, a multisig wallet can be used as a two-factor authentication mechanism to protect their assets. For example, an user can create a multisig wallet with one private key stored in a hardware wallet and the other one in his/her laptop device. Only someone who has access to both keys is allowed to send a transaction from the multisig wallet.
In short, multisig wallets can enhance the security of digital assets and have numerous interesting applications, making them more appealing in the crypto world, especially to DAOs and NFT teams.
What is Gnosis Safe?
The Gnosis Safe, a leading global multisig wallet brand, runs as a smart contract on numerous blockchains that enables organizations and individuals to fully customize digital asset management for multisig wallets.
Why is cold storage needed for a multisig wallet?
A multisig wallet enables a DAO or a NFT team to reduce risks of theft or misappropriation by decentralizing authorization among multiple signers. However, if the infrastructure of the team or the applications from service providers are exposed to malicious actors, the attackers can take control of the multisig wallet by compromising a sufficient number of addresses.
Applying a combination of a multisig wallet with cold wallets therefore becomes a safer solution to protect digital assets. As a cold wallet is not connected to the internet and allows users to sign the transaction with the private keys in an offline environment, it can thus prevent malicious actors from being able to access the owner’s holdings. Those private keys required to sign the transactions for a multisig wallet can be stored in cold wallets to decrease the risks of being vulnerable to hackers.
Using CoolWallet with a multisig wallet
CoolWallet, established in 2014, is one of the most trusted hardware wallets in the industry, equipped with advanced security technologies inside its unique smart card body. These include an encrypted military-grade Bluetooth connection (AES 256) and 2+1 factor authentication that requires all transactions to be biometrically and physically verified on your phone and device respectively.
With the cold storage technology of CoolWallet, your private keys are stored offline and permanently sealed inside CoolWallet’s EAL6+ secure element, so the stored digital assets are not exposed to hacks and scams.
Therefore, a CoolWallet Pro can be used for each private key of a multisig wallet to help your DAO/NFT team securely sign the transactions of your project. A multisig wallet requiring several private keys, each of which is secured by CoolWallet Pro, will enable your team to fully decentralizie authorization, while raising your security to the highest levels.
An individual investor can also enhance the crypto security by considering CoolWallet as one of the storages for private keys that are required to sign a transaction for a multisig wallet.
Best of all, CoolWallet is all about everyday use and convenience, as can be seen through its eye-catching design and 2-month long battery life.
Its wafer-thin smart card form factor makes it easy to carry in your actual wallet discreetly. CoolWallet’s patented cold compression technology also protects you against supply-chain tampering and makes it waterproof.
CoolWallet allows you to retain access to your funds in cold storage on the go, wherever you are, in order to manage you or your company’s portfolio to the best of your ability.