When it comes to learning about DeFi and various protocols under its umbrella, one might come across this term called multisig contract and its benefits of adding another layer of security. So what exactly does this term means what are those benefits?
Well, in this blog post, we’ll understand the concept of a multisig contract in a simple layman language and why should you care about it before interacting with a DeFi protocol or platform. So let’s start, shall we?
Introduction to Multisig Contracts
Multisig aKa multi-signature contracts can be simply defined as a storage method of funds on a blockchain network when there is more than one owner of the fund. Let’s understand it better starting with the basics.
On a blockchain network, you store your digital assets in a wallet with a public key and a private key (secret key). A public key is like your bank account that allows you to receive cryptocurrency transactions. Whereas, a private key must be kept secret and shouldn’t be shared with anyone but the owner of the wallet. The private key is needed to prove the ownership of funds in order to transfer them to another wallet.
Now, let’s imagine a corporation or an organization that is holding a large amount of funds in a wallet secured by a private key. In this case, anyone holding the private key has access to all the funds and can make a transaction as she pleases. Furthermore, in case, the private key is compromised by a malicious actor, it could lead to a disaster resulting in loss of all the funds. There comes multi-signature contracts.
What is a Multi-Signature Contract?
A multi-signature contract is a smart contract that requires approval from more than one address with their separate private keys for a transaction to be executed. These different addresses are often owned by different people who have a say in approving transactions from the organization’s wallet. So how does it work?
Well, a multisig contract requires a given number of signatures, usually a majority share of signatures to approve a transaction before it can be executed. Let’s say a corporation with five board members decides to set up a multisig contract.
In this case, rather than holding funds in a hardware wallet, the corporation can set up a multisig contract where all the funds are stored and every board member is added as an owner of that contract. Now, the corporation can decide a majority share of approvals (in this case, at least three out of five) for a transaction to be approved.
In the above example, for every transaction to occur, at least three out of five board members should approve the transaction using their own private keys. So what are the benefits of using a multisig contract? Let’s find out.
Benefits of Multisig Contracts
Here are the three major benefits of using a multisig contract instead of a simple wallet.
- Avoiding single point of failure. In case, one of the board members turns malicious or accidently loses her private key, the funds will still be safe as it needs two more members to approve the transaction.
- Decentralization of power. By leveraging the mutlisg contract, the responsoibility of funds can be split among more than one person, thus decentralizing the power and responsibility.
- Censorship resistance. If one person has the ownership to all the funds, that person can be forced or coerced by a state authority to give up the funds. With multisig contract, coercing a single person won’t result in lose of funds.
I hope you got the basic idea of multisig contracts and learned a new concept about blockchain technology. Stay tuned to HyperTrader Blog for more such explainers. Also, download today and become a HyperTrader.