How to use Bitcoin multi-signature? 10 tips for beginners
Original title: "TOP 10 TIPS FOR EVERY BITCOIN MULTISIG BEGINNER"
Original author: UNCHAINED AND TYLER CAMPBELL
Original translation: Frost, BlockBeats
Editor's note: This article introduces the operation mechanism of Bitcoin wallets, how to use it, the benefits of multi-signatures, and how it works in a collaborative custody environment. It is designed to help Bitcoin ecosystem users who are just beginning to understand multi-signatures. BlockBeats organizes the original text as follows.
As the technical director of the Unchained team, I answer countless questions from customers about Bitcoin multi-signatures. If you are just beginning to understand the benefits of multi-signatures and how it works in a collaborative custody environment, I hope these ten tips can solve some of your problems.
Bitcoins Don’t Live on Your Device
The term hardware wallet might make it seem like your Bitcoins live within the wallet itself, but that’s not the case, as the Bitcoins are not on your device at all. In reality, your wallet only generates and stores your keys. Your wallet also makes it easy to access your keys by plugging your device into a general-purpose computer or sharing information with a computer via a microSD card.
The Bitcoin blockchain is a ledger that records every transaction that has ever occurred and the balance of every address on the network. Rather than storing your Bitcoins, your hardware wallet protects and stores the keys that unlock or spend Bitcoins from those addresses.
You Can Restore Your Recovery Phrases to Another Hardware Wallet
When you set up your Bitcoin hardware wallet, you should be prompted to back up your wallet using 12 or 24 words, usually written down on a slip of paper, in case something ever happens to your wallet. These 12 or 24 words are your mnemonic phrase as specified in BIP 39 or BIP39.
A mnemonic phrase is like a “key to the castle”, it contains everything you need to recover and use the keys for all addresses protected by the mnemonic phrase.
The benefit of BIP39 mnemonics is that they are interoperable between hardware wallets that support the standard, which means you can restore your Bitcoin wallet backup (mnemonic phrase) to another hardware wallet. If you initially set up your Bitcoin wallet on Trezor and want to migrate to Coldcard, then just import these 12 or 24 words.
Reference: How to Replace or Upgrade Bitcoin Hardware Wallet
You Can Receive Bitcoin Without Carrying a Hardware Wallet
When using physical cash, you must be physically present to conduct a trustless and secure transaction with another party. Bitcoin solves this problem for the digital world. If you want to receive Bitcoin but don't have a hardware wallet on hand, you can still send the payment to the corresponding address.
As mentioned above, Bitcoin does not exist in your hardware wallet, it exists on the Bitcoin blockchain. Therefore, as long as you or someone else sends Bitcoin to an address that you control with a private key, you will always be able to transfer those funds, regardless of whether you have physical access to your device. If Bitcoin is sent to an address that you know you control, it will arrive perfectly in the background without your participation.
What this means for you: If you create a multi-signature wallet and store your hardware wallet or mnemonic phrase in a secure location, you can deposit funds without physically visiting them.
Device used as a key in multi-signature can still be used as a single-signature wallet
Multi-signature involves building a multi-signature wallet using the public keys of multiple devices, each of which can also act as an independent single-signature wallet. When you create a multi-signature wallet following the emerging standard process, pre-existing single-signature wallets do not conflict with the multi-signature wallet.
You can think of it as a group email address that forwards to multiple separate email addresses.
This means that if you wish, you can store a small amount of Bitcoin on a single-signature wallet while keeping the majority of your wealth in a multi-signature wallet built using that device as one of the keys.
Confirm your multi-signature deposit address
Bitcoin transactions are completely irreversible, which means that if you send Bitcoin to the wrong address, it can be lost forever. Thankfully, you can check the multi-signature Bitcoin address on your device using a hardware wallet before sending funds.
Checking the address on your device confirms three things:
· The address was constructed correctly, e.g. it is a 2-of-3 multi-sig and not a 2-of-5 where an attacker added two keys and actually controlled the funds
· The computer you are using has not been compromised by malware that looks for Bitcoin addresses and replaces them with the attacker's address
· Your device has the keys to that address.
Before sending large amounts of funds to any address, whether single-signature or multi-signature, you should check the address on your device. As of the time of writing, Trezor and Coldcard support checking multi-signature deposit addresses in the Unchained platform.
Reference: How do I verify the receiving/deposit address on my hardware wallet?
Signing without having your devices together
With multi-signature, you don't need to have all of your keys in the same place at the same time to spend your Bitcoin. This means you can sign a transaction with one key at location A, and a day later sign a transaction with another key at location B. Only once all necessary signatures (e.g. two signatures in a 2-of-3 multi-signature scheme) have been collected can the transaction be initiated.
This is a significant advantage over other Bitcoin custody models like Shamir’s secret sharing scheme, which allow you to distribute control of a Bitcoin private key by splitting it into multiple parts, but require all parts to be present at the same time to recompile a key and create a transaction.
Mistakes in Multi-Signature Still Recover Funds
In all Bitcoin multi-signature setups where m (the number of keys required to sign) is less than n (the total number of keys in the quorum), you are protected from single points of failure and can still recover your funds or items lost, stolen, or otherwise compromised in the event of a single point of failure.
In a 2-of-3 multisig (where a third key is held by a collaborative escrow partner like Unchained), in some cases up to three items can be compromised before your funds are no longer recoverable.
Some ideal places to store your Bitcoin wallet and seed phrase backups
While the fault tolerance mechanisms in multisig give you peace of mind, your seed phrase and hardware wallet should still be well-preserved, and you should always regain full control of your wallet as soon as possible.
Reference: The Ultimate Guide to Storing Bitcoin Seed Phrase Backups
If Needed, You Can Replace Keys in a Multisig Setup
When using Bitcoin multisig, it is very important to replace this key in a multisig m-of-n scheme if you lose your wallet or misplace your seed phrase. You can do this with any popular multisig wallet.
Even in the most common multi-signature m-of-n scenario, where a single compromised key alone will not compromise your funds, replacing a compromised key will ensure that you regain full control of your funds and reduce the likelihood that the key could be used against you in the future.
Reference: How to Replace or Upgrade Bitcoin Hardware Wallets
You Can Use the Same Device to Build Multiple Multi-Signature Wallets
As we mentioned in point 4, using a hardware wallet or mnemonic as a single-signature wallet and building a multi-signature wallet will not cause any problems. Likewise, using a hardware wallet or mnemonic for multiple multi-signature wallets will not cause conflicts between those wallets as long as you do not use the same extended public keys (xpubs). In most Bitcoin wallets, this is usually manifested as a multi-account feature.
Hardware wallets allow you to use different xpubs from different paths, which is a technical way of saying a different set of Bitcoin keys generated from the same 12 or 24 word seed phrase on a hardware wallet. This means you can create multiple multi-signature wallets derived from the same set of seed phrases or devices, such as using the same device for a personal vault and an IRA vault, and perhaps even a loan vault.
Collaborative custody does not introduce a single point of failure
When Unchained started working on multisig collaborative custody, one of the concerns I heard most often had to do with reliance on our platform. If Unchained ceased to exist or experienced a major outage, how would you recover your funds if your wallet was built using our tools?
Multisig platforms are designed to eliminate all single points of failure, and Unchained is no different. Because our platform is fully interoperable with established Bitcoin standards, you can always restore access to your vault outside of the Unchained platform using compatible software (such as our open source multisig coordinator, Caravan) or a Bitcoin wallet (such as Sparrow or Electrum), just make sure to securely back up your wallet configuration files.
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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