How to self-custody bitcoin? First, choose a reliable non-custodial wallet, then decide how many keys will sign transactions.
With the team of the bitcoin mixer Mixer.Money, we outline the advantages of multisignature and explain how to create a multisig wallet.
What singlesig and multisig are
Синглсиг — a transaction-signing scheme using a single private key. It is the oldest and simplest way to store bitcoin, but it creates a single point of failure: if the key is lost or stolen, you lose the coins forever.
Common ways to mitigate the risks:
- backing up the seed phrase. Store backups in different places to reduce the chance of loss or destruction. The vulnerability is that access to any one backup is enough to steal the cryptocurrency;
- splitting funds across several wallets. In this case, an attacker cannot steal all the bitcoin;
- adding a passphrase (BIP-39). Set an extra password for the seed phrase. Without it, a hacker cannot access the wallet even if the seed is compromised;
- using Shamir’s secret (SLIP-0039). Split a seed into n shares so that a defined number of them (m-of-n) can reconstruct the private key. For example, to recover a seed phrase from nine shares, seven are required;
- creating a Seed XOR. Assemble a master private key from multiple seeds. Each of them can also hold bitcoin.
Мультисиг — a transaction-signing scheme that requires several private keys to spend bitcoin. This method eliminates a single point of failure.
The first multisig wallet was released by BitGo in August 2013. Over time, the scheme was adopted by exchanges and holders of large stashes of digital gold.
When creating a multisignature wallet, a user defines:
- the total number of keys (n);
- the quorum required to sign a transaction (m-of-n).
For example, a 2-of-3 scheme means there are three keys and at least two of them are needed to spend the funds.
“Multisignature resembles splitting a seed using Shamir’s scheme, but there is an important difference. If a transaction is created to spend bitcoin from a multisig wallet, the key holders can sign it independently at different times and in different places,” comment representatives of Mixer.Money.
The model suits a group who want to manage a shared address while keeping keys independent of one another.
Multisig wallets offer stronger protection but are generally less convenient. Each spend requires collecting several signatures that may be far apart and/or controlled by different people.
The network also charges higher fees for multisignature transactions. However, activation of the Taproot soft fork removes this drawback.
Which to choose for storing bitcoin
To decide which model fits, set your priorities. Typically, singlesig is chosen by:
- beginner bitcoin investors;
- experienced users who prefer extra layers of seed-phrase protection such as a passphrase, Shamir’s scheme, and so on.
Multisig is suitable for:
- holders of large amounts of bitcoin who are not confident about keeping a seed phrase safe;
- employees of companies/exchanges for shared control of cold storage.
Single- and multi-signature setups do not compete; they complement each other. It is sensible to use multisig for long-term investments and singlesig for trading and everyday transactions.
How to create a multisig wallet
Two options are available: turn to collaborative-custody companies or build a multisig setup using Electrum or Sparrow Wallet.
The first option has the advantage of a simple setup process and therefore a lower risk of error. Downsides include a paid subscription and a lack of privacy.
For example, providers Casa and Unchained use a 2-of-3 multisignature scheme. You control two seeds, and the service stores the third. One key can be your mobile phone, another a hardware wallet.
With the second option, you do not pay a custodian and you choose the wallets and the signing scheme yourself.
“When setting it up yourself, you can choose any scheme: 2-of-3, 3-of-5 or even 2-of-2. But multisig services consider the 2-of-3 model the most optimal.
It provides security for your keys without complicating their storage. Schemes above this threshold require access to several secure locations, which often does not increase overall security.
Never use 2-of-2 or 3-of-3 models, because they create two or three single points of failure at once. If you lose one key, you will permanently block access to your bitcoin,” explains the Mixer.Money team.
Bear in mind that do-it-yourself setup increases the risks associated with human error.
“You need to know about xpub and BIP-32 derivation paths. This information can be found in the configuration file, which you will also have to store yourself. If these data are damaged or lost, you will lose access to the coins even if you have the required number of keys,” they note at Mixer.Money.
For example, when configuring a 2-of-3 scheme via Sparrow Wallet, you need to create a backup of the multisig wallet. It is acceptable to store the backup on a computer protected with an extra password: the file contains only extended public keys.
Using your own multisig setup with bitcoin mixers such as Mixer.Money can ensure maximum privacy for funds.
In the “Full anonymity” mode, Mixer.Money sends users “clean” coins from large exchanges. This approach reduces to zero the likelihood of receiving your own assets back or coins of dubious origin.
A detailed guide to setting up a multisig wallet in Sparrow Wallet is published on the blog of the BitBox hardware-wallet developers.
Conclusions
Singlesig is a good choice for most users. It will provide reliable protection for coins if you follow seed-storage rules and add extra safeguards such as a passphrase.
Holders of significant stashes of digital gold should consider multisignature wallets. You can start with collaborative-custody services and, after gaining experience with them, create your own multisig setup.