What are MPC Wallets and Multi-Sig Wallets?
MPC Wallets and Multi-Sig Wallets provide businesses with joint control over cryptocurrencies and other digital assets. However, while multi-signature wallets require multiple private keys to sign a single transaction, MPC wallets split a single cryptographic key into multiple shares, requiring a specific number of shares to authorize a transaction.
What are single-signature wallets?
Single-signature wallets are those with the most basic key management system. In this type of wallet, a single private key executes transactions on the blockchain. Any entity with access to the private key will have full control over the stored cryptocurrencies.
The private key in single-signature wallets can be considered a ‘single point of failure.’ If the security of the private key is compromised, all funds stored in this wallet can be stolen.
Therefore, a single-signature wallet is primarily used by individuals to store relatively small amounts of cryptocurrencies for active investments and other DeFi products. These are often used alongside a cold wallet, which is employed to store a significant portion of an investor’s funds offline.
If you lose your private key, there is no way to recover it. Your money can be lost forever. This lack of redundancy makes single-signature wallets a potentially risky choice for storing large amounts of cryptocurrencies, as seen in stories of individuals losing Bitcoin-containing hard drives or forgetting passwords to access their wallets.
Since only one private key provides full control over the funds, there is no method to grant partial or full access permission to the funds.
In conclusion, single-signature wallets are more suitable for individuals rather than groups, communities, treasuries, or companies, where transactions typically require approval from multiple stakeholders.
What are Multi-Sig Wallets (multi-signature wallets)?
A Multi-Signature Wallet (multi-sig wallet) is a cryptocurrency wallet that addresses some significant limitations of single-signature wallets, such as the lack of shared access, by requiring multiple private keys (cosigners) to sign a single signature, thereby introducing additional security measures. The private keys do not need to be located on the same device and can be distributed across different devices in different locations.
Although multi-signature technology was not new, it was first used in the cryptocurrency space in 2012 for a Bitcoin transaction that introduced a new address type called ‘pay-to-script-hash (P2SH).’ The first multi-signature wallet was created in 2013.
How do Multi-Sig wallets work?
Imagine Company A, which holds BTC in its treasury. The company wants to send the Bitcoins to another entity, for example, Company B.
In this case, the company can ensure that funds from the multi-signature wallet are only disbursed once the majority of stakeholders, let’s say at least 5 out of 7 board members, sign with their respective private keys.
This allows Company A to distribute authorized funds without any individual having to disclose their private keys.
At its core, the fundamental purpose behind multi-sig wallets, down to the finest detail, is to distribute control of funds without exposing private keys in a single wallet.
How do multiple private keys sign a single transaction?”
Multi-signature wallets use an algorithm known as ‘M-of-N.’ This algorithm requires at least M out of N private keys to sign a transaction before it can be broadcast.
The general consensus is that the higher the required number of signatures (M) and the total number of available keys (N), the more secure the wallet becomes.
For example, a 3-of-5 multi-signature algorithm requires three out of five private keys to sign a transaction before execution. A 7-of-5 multi-signature, on the other hand, requires five out of seven private keys to sign a transaction, and so forth.
The variables ‘M’ and ‘N’ can be adjusted during wallet creation based on the user’s corporate requirements. Additionally, M-of-N algorithms provide an easy recovery from lost private keys as long as there are enough remaining signatures (M) required for transaction authorization.
The general workflow of a Multi-Sig Wallet transaction
The general process of a multi-signature transaction is as follows:
- Generate a multi-signature wallet address from the public keys of authorized signatories.
- Create a proposal containing all necessary details, such as the recipient’s address and the amount to be sent.
- Cosigners review the transaction proposal and either accept or reject it.
- After collecting the required number of signatures, the transaction is accepted as authorized and confirmed.
- The authorized transaction is then broadcasted, along with all signature data, for verification and block confirmation.
What are MPC Wallets?
Multi-Party Computation (MPC) wallets are one of the latest developments in the DeFi space, combining the best aspects of single-signature wallets (a single private key) and multi-signature wallets (shared control of funds) into a single solution.
Multi-Party Computation is a cryptographic technique that enables privacy among three or more entities by splitting a single cryptographic key into multiple pieces, ensuring that no entity can access the original key alone.
Each signer holds a portion of the private key, but this is not sufficient to reconstruct the entire private key. To reconstruct a private key or authorize a transaction, a specific number of shares, known as the ‘threshold,’ are required. This threshold can be set during wallet creation or adjusted later.
An MPC wallet utilizing this technique, known as ‘Secure Multi-Party Computation (SMPC),’ allows all signatories to create and sign transactions without the need to share their private keys with each other.
This differs from a multi-signature wallet because instead of creating multiple private keys, it splits a single private key into multiple shares.
Different MPC wallets use various secure multi-party computation protocols. Some commonly used protocols include Shamir’s Secret Sharing (SSS), Yao’s Garbled Circuits, and Fully Homomorphic Encryption (FHE).
MPC wallets can be used for various applications such as decentralized transactions, key management, distributed storage, and authentication. They are gaining increasing interest among businesses and organizations that require shared access to funds.
The general MPC Wallet transaction workflow.
The general process of an MPC transaction is as follows:
- Initiate a transaction by sending a request to the M-wallet provider’s server.
- The server generates a random number and encrypts it with the user’s private key share.
- The server sends the encrypted random number back to the user.
- The user decrypts the random number’s cipher with the private key share.
- Sign the transaction with the decrypted random number.
- Send the signed transaction back to the server.
- The server combines the user’s signature with the signatures of other parties involved in the transaction.
- The authorized transaction is then broadcasted for block confirmation.
