Imagine managing a million-dollar investment fund stored in a cryptocurrency wallet. Everything runs smoothly until a single mistake—clicking a phishing link, visiting a malicious website, or falling victim to an undiscovered exploit—allows hackers to drain the wallet. Just like that, the assets are gone forever.
This nightmare scenario has played out in several high-profile crypto thefts, including the Japan-based exchange Coincheck in 2018, the Ronin Network in 2022, and most recently, the Bybit exchange in February 2025. While the causes of these breaches varied—ranging from private key compromises to smart contract exploits—they all underscore the importance of multiple security layers in Web3.
One of these protections is the so-called “multi-sig wallet,” which requires more than one person’s signature, via their private key, to authorize a crypto transaction.
A cryptocurrency wallet lets users store, send, and receive crypto by managing their private and public keys. When making a transaction, the user, via the wallet, signs it with a private key, proving ownership before broadcasting it to the blockchain for validation. Wallets can be custodial (managed by a third party such as Coinbase) or non-custodial (fully controlled by the user) and come in software or hardware forms.
What is a multi-sig wallet?
A multi-sig wallet functions similarly to a traditional crypto wallet but introduces a crucial layer of security by requiring multiple users’ private keys to approve a transaction. For instance, in a “2-of-3” setup, two out of three key holders must authenticate a transaction. This makes multi-sig wallets particularly appealing for businesses, online communities, and shared accounts, as they significantly mitigate the risk of unauthorized transactions.
Envision a high-security bank vault that necessitates several individuals to turn their keys simultaneously or a missile silo requiring multiple keyholders; multi-sig wallets offer a comparable mechanism. This structure prevents any one person from moving funds independently, thus enriching security further.
“A multi-sig wallet requires multiple parties to approve any transaction that moves assets,” Dan Hughes, the founder of blockchain UX developer Radix, explained to Decrypt. “A common setup is ‘3 of 5,’ meaning five individuals are authorized to sign, but at least three must consent for the transaction to be accepted into the network.”
While single-key wallets are predominantly utilized by individuals, businesses, decentralized autonomous organizations (DAOs), and exchanges generally favor multi-sig wallets for enhanced control over their funds.
Cryptocurrency wallets that support multi-sig functionality include:
The use of multi-sig wallets is on the rise. In 2024, Safe managed assets exceeding $100 billion, with 1.6 million active monthly users. In a remarkable feat, BitGo reported that it processed over 8% of all global Bitcoin transactions by value and serves over 1,500 institutional clients across more than 50 countries. Furthermore, the Solana-based Cashmere wallet reported a total value locked of $100 million.
Use cases of multi-sig wallets
- Business Security: Companies can distribute keys among executives to prevent any single individual from unilaterally transferring funds.
Escrow Services: A 2-of-3 multi-signature structure can encompass a buyer, seller, and a neutral third party (escrow). If both parties concur, the transaction moves forward; otherwise, the third party intervenes.
Personal Backup: Individuals can safely store one key on their mobile device, another in a hardware wallet, and a third with a trusted friend, ensuring that losing one key doesn’t result in losing everything.
How multi-sig wallets work
Multi-signature wallets function through secured multiple approvals before executing a transaction. Here’s a breakdown of the process:
- Upon creating a multi-sig wallet, multiple private keys are generated and distributed among various individuals or devices.
- A user initiates a transaction request, but it is not immediately recorded on the blockchain.
- The transaction remains in a pending state until the required number of keyholders provide their approvals. For example, in a setup requiring 2 out of 3 approvals, at least two keyholders need to sign off.
- After receiving the necessary approvals, the transaction is finalized and broadcast to the blockchain for validation, confirmation, and permanent recording.
Benefits of multi-sig wallets
Increased security: By mandating multiple transaction approvals, security is significantly enhanced.
Protection against theft: Funds remain inaccessible without additional approvals, safeguarding them in case one key is compromised.
Prevent scams and fraud: With no single party able to unilaterally drain the wallet, risks of fraudulent activities are minimized.
Redundancy protection: If one key is lost, access to the wallet can still be safeguarded by utilizing the remaining authorized keys.
The growing popularity of multi-sig setups not only bolsters security but also introduces redundancy protection. As Hughes articulated, “If one of five individuals loses their key, the funds remain accessible due to the existence of four other keys, of which three are needed.” He emphasized that without multi-sig mechanisms, losing a key could mean losing access to assets unless another accessible recovery option, like seed phrase recovery, is available.
Potential risks of multi-sig wallets
While multi-sig wallets enhance security significantly, they do pose certain challenges. Sean Li, co-founder and CEO of cryptocurrency wallet developer Magic Labs, shared insights regarding these potential pitfalls.
“The complexity of more advanced multi-sig wallets can introduce a wider attack surface due to increased code complexity and coordination logic vulnerabilities,” Li noted, remarking on the propensity for bugs in smart contracts. He posited that as new mechanisms—such as spending limits or time locks—are integrated, vulnerabilities might surface. Rigorous smart contract audits and formal verification processes are crucial for mitigating these risks.
Despite their security benefits, multi-sig solutions may not be the first choice for the average cryptocurrency user.
Henry Fisher, Marketing Manager at Cake Wallet, pointed out, “There’s a reason the typical cryptocurrency wallet isn’t a multi-sig wallet.” More keys lead to additional steps and complexities, from wallet creation to signing transactions and backing up keys. Fisher added that developers can minimize these challenges by enhancing user education, crafting more intuitive interfaces, and promoting best practices.
“It’s not unheard of for individuals to misplace their funds by neglecting to back up their keys or inadvertently sharing them,” he remarked. “With multi-sig wallets, this careful management becomes even more critical across multiple keys.”
Who uses multi-sig wallets?
Businesses: Firms dealing with cryptocurrency payments or payroll can leverage multi-sig wallets to thwart unauthorized transfers and internal fraud.
Large cryptocurrency holders: By distributing signing authority, they can minimize the dangers of theft and phishing.
DAOs: Multi-sig wallets facilitate transparent and collective decision-making regarding treasury management and governance.
The future of cryptocurrency wallets
Multi-sig wallets play a pivotal role in safeguarding cryptocurrency treasuries by significantly reducing the threat posed by a single key compromise. However, the intricate setup process often discourages everyday users from opting for this level of security.
Looking ahead, advancements in smart contract technologies, threshold signatures—allowing joint signing of transactions without revealing individual keys—and account abstraction—simplifying user engagements through flexible access controls—could enhance the accessibility and usability of multi-sig wallets, paving the way for innovative “smart wallets.”
“Smart wallets are the Swiss Army knives of crypto storage,” remarked Gnosis co-founder and Safe Wallet developer Friederike Ernst, emphasizing that “They support multiple signers and enable credential rotation if lost or stolen.” She further explained that the recovery process is customizable—potentially involving a bank for KYC verification or a committee of trusted friends.
According to Ernst, smart wallets represent the next evolution in cryptocurrency wallet technology, enhancing security, usability, and resilience through programmable logic. While multi-signatures already improve security, smart wallets provide customizable recovery options and role-based access, ensuring user flexibility and protection.
As developers continue to refine user experiences alongside security features, multi-sig and other sophisticated wallet solutions will empower fund managers with the necessary tools to keep digital assets secure in an increasingly perilous online environment.
