Multisignature Technology Explained
Standard transactions on cryptocurrency networks can be called single-signature transactions, because they require only one digital signature for funds to be transferred. However, cryptocurrencies such as Bitcoin can support what is known as multisignature (also known as multisig) technology. Multisignature is the requirement that transactions have two or more signatures before they can be executed. Multisignature transactions are also referred to as M-of-N transactions, with M being the required number of signatures or keys and N being the total number of signatures or keys involved in the transaction.
1-of-2: Alice and Bob have a joint cryptocurrency address, and the signature of either person is sufficient to spend the funds.
2-of-2: Alice and Bob have a joint cryptocurrency address, and the signature of both persons are required to spend the funds.
Multisignature technology can also be used for a 2-of-3 escrow service between buyer-seller, and a third-party arbitrator. For example, Bob and Alice engage in a transaction, whereby Bob will send Alice bitcoins in exchange for goods that she is selling. If the transaction operates as intended, then both Bob (as a buyer) and Alice (as a seller) will sign the transaction to transfer the money to Alice, upon arrival of the goods. If something goes wrong and the goods do not arrive, then Bob and Alice can again both sign the transaction to refund Bob. If Bob and Alice cannot agree as to who should receive the money, then neither will be able to claim the funds as their own, as a second signature would be required for its transfer. A third-party will have to arbitrate and provide the second signature to the party it deems as the most deserving. It is also important to note that the arbitrator themselves cannot steal the money, as they too would require a second signature from either Bob or Alice.
Multisignature technology has the important advantage of providing added security to cryptocurrency transactions. This is done by eliminating single points of failure by ensuring that the keys that may be required for a multisignature cryptocurrency address are generated and stored on separate devices. One key might be generated on Bob’s personal computer, whilst the other key is generated on his mobile phone. This would ensure that the successful hacking of Bob’s laptop would not result in his funds being stolen, as the hacker would also need the key generated on Bob’s mobile phone in order to steal his funds.
Multisignature technology is no different to paper-based financial agreements that may require more than one signature. For example, some corporate cheques need more than one signature for them to be processed. However, it is the combination of blockchain technology and multisignature technology that indicates an evolution in the manner in which electronic transactions will be conducted in the future.