What are multi-sig wallets, and how can they potentially prevent wallet drains and hacks?
February 22nd, 2024

Bob bought a token ($MKN) for $50, and it pumped overnight, netting him a profit of $4500. He wakes up the next morning, and after seeing the news, eagerly logs into his wallet. Upon accessing it, he sees a balance of $0.

He pauses and thinks, 'Maybe this is a network issue. Let me try opening my wallet again.' He closes the wallet and logs in again, but alas, this is no network issue. What he sees staring at him is his actual balance.

Now, what actually happened? After purchasing $MKN, he went on to claim an airdrop he was emailed that he was eligible for. While he was truly eligible for the airdrop, the protocol had earlier stated that they wouldn't email anyone to claim the airdrop.

Unfortunately, poor Bob wasn't aware of this, which is why he clicked the link that was sent to him by malicious individuals. This gave them access to his wallet when he signed the transaction to claim the airdrop, leading to him getting his wallet drained.

And get this, he's not the only one affected. According to Scam Sniffer, 320,000 users were drained of $300 million+ in 2023.

But more importantly, the occurrence could have been prevented if Bob was using a multi-sig wallet.

Which begs the question: What are multi-sig wallets? And how can they prevent wallet drains?

What are multi-sig wallets?

Consider this example: your company has an account with a bank, and you're told to make a purchase on behalf of the company. However, when you try to make the payment, it requests additional confirmation, leaving you confused.

You then call your manager, and he says, "Sorry about that, Chris. I totally forgot to tell you that before any transaction goes through, the CEO has to call the bank moment to give his authorization. I'll ring him up now."

Similarly multi-sig wallets also called multi-signature wallets are a type of cryptocurrency wallet that requires multiple approvals for a transaction.

If you're interested in the nitty-gritty of how they work, you can check it out - [Here].

How can they prevent wallet drains?

The big idea behind multi-sig wallets is that before any transaction is finalized, 2 or more approvals are needed. So, if you happen to slip up and click on the spam link that grants access to malicious individuals, they would not be able to move any assets because other wallets will be required to authorize the transaction.

You can gather from this that the greater the number of wallets required to sign, the harder it is for the attacker to move or make off with your assets.

Multi-sig wallets are suited for projects and companies who want to ensure transparency in their fund management and also secure their treasury wallets.

Take, for example, the Ripple co-founder Chris Larsen who was drained of $112 million on Jan. 31. Assuming he had a multi-signature wallet, there's a probability that the drain could not have happened.

But even if you're not a project founder, you can also use it to secure your own personal wallet and enhance the security of your wallet.

Pros of using a multi-signature wallet

• Better Recovery Options: If one of the keys in a multi-signature wallet is lost or stolen, the funds can still be recovered as long as the remaining keys are available. However, this also depends on the recovery mechanism set up.

• Better Governance: With multi-sig wallets in DAOs, each decision requires the approval of multiple members, fostering trust and transparency. it also prevents one person from misusing or taking all the funds from the treasury wallets.

Cons of using a multi-signature wallet

• Higher Fees for Some Transactions: Sometimes, fees on multi-sig wallets can be higher than those of traditional wallets. This is because multi-signature transactions are generally larger in size and may incur higher fees when sent on a blockchain that charges fees based on transaction size.

• Slower Transactions: Multi-signature transactions can take longer to process than regular transactions since they require more communication between the involved parties.

I need to say this: If you want to use a multisig wallet personally, you don't need to find 2 or 3 other people. Just set up 2-3 different wallets (I advise on different devices, probably your PC and phone), and you're good to go.

And it's a wrap. If you found this insightful, share with someone who needs to stay one step ahead in the crypto world and don't forget subscribe to my newsletter where I'll be breaking down complex web3 topics.

Cover Image Credit - Peercoin

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