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Things We Find Interesting in Cryptocurrency

Feb 16

Multisig Transactions

By Raymond Prince

When dealing with anything of value, the main question owners will have is regarding security. Within the Bitcoin network, secuirty is of utmost importance in order to see continuously increasing adoption rates. However, secrutiy concerns have created a situation in the Bitcoin network where transactions could never be reversed. How does this effect the users?

Bitcoin is predominantly used for online transactions which requires a certain level of risk since the buyer must trust that the seller will hold up their end of the agreement once the funds have been transferred. In traditional banking systems, the concept of Escrow was formed in order to protect both buyer and seller from malicious intent. This does however add additional steps in the transaction process as well as incur additional costs.

Multisig As A Concept

In the Bitcoin system, the concept of multisig transactions has attempted to mimic the core concept of escrow. Regular Bitcoin transactions use a private key to sign a transaction, and when broadcast to the Bitcoin network, all nodes confirm that that signature does in fact have the right to spend those funds. Multisig adds a second layer of security to transactions.

In this scenerio, the buyer would send the funds to a multisig, which can be thought of as a vault. The vault requires two keys to be opened. In this case, the buyer, the seller and a trusted thirdy party all have a single key. The final transaction where the funds get transferred from the multisig to the receing party, cannot be broadcast to the Bitcoin netowrk without at least two signatures out of the three.

Therefore, if both parties uphold their promise, the buyer will sign the transaction, and the seller will also sign the transaction with their individual private keys, and the transaction will be broadcast to the Bitcoin network. If either party does not uphold their part of the agreement, the trusted third party may step in. They will decide if the buyer or seller is at fault, and will then send the funds back to that party, by signing it with their private key, and the receiving party will also sign the transaction, which will then be broadcast to the Bitcoin network.

Multisigs are not limited to just 3 parties. Multisigs can be made up of multiple Bitcoin addresses and require 1 out of 3 signatures, or 4 out of 11, any combination is up to the initiator. The interesting part about the multisig feature is that the third party is only used if there is a dispute. Therefore, the third party's fee can be avoided if the transaction proceeds correctly without any intervention needed. This is different from the traditional escrow service, where the third party's services are paid for up front before the transaction has started.

This system eliminates the trust issue between parties who have no relationship, while still maintaining the low cost and high speed of transactions between trusted parties, friends or situations where the sender does not require any goods in exchange for the funds, such as a charity donation. These systems have major real world implications for the traditional banking model and will no doubt have a significant impact on the future of e-commerce.