What’s a Multisig Contract?

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When learning about Defi and various protocols under its umbrella, one might come across this term called multi-sig 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 multi-sig contract in a simple layman’s 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 fund owner. Let’s understand it better, starting with the basics.

You store your digital assets on a blockchain network in a wallet with public and private keys (secret keys). A public key is like a bank account that allows you to receive cryptocurrency transactions. A private key must be kept secret and shouldn’t be shared with anyone but the wallet’s owner. The private key is needed to prove the funds’ ownership to transfer them to another wallet. 

Let’s imagine a corporation or organization holding funds in a wallet secured by a private key. In this case, anyone holding the private key can access all the funds and 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 the loss of all the funds. There are 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 multi-sig 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 multi-sig contract. 

In this case, rather than holding funds in a hardware wallet, the corporation can set up a multi-sig 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 private keys. So what are the benefits of using a multi-sig contract? Let’s find out.

Benefits of Multisig Contracts

Here are the three major benefits of using a multi-sig contract instead of a simple wallet.

  1. Avoiding a single point of failure. In case one of the board members turns malicious or accidentally loses her private key, the funds will still be safe as it needs two more members to approve the transaction.
  2. Decentralization of power. By leveraging the mulling contract, the responsibility of funds can be split among more than one person, thus decentralizing the power and responsibility.
  3. Censorship resistance. If one person has the ownership of all the funds, that person can be forced or coerced by a state authority to give up the funds. With a multi-sig contract, coercing a single person won’t result in a loss of funds.

I hope you got the basic idea of multi-sig 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.

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