A multi-signature wallet is a cryptocurrency wallet that requires more than one private key for a signature required for a transaction.
A standard bitcoin transaction requires one private key to sign a message and validate a transaction but with a multi-signature wallet, the funds can only be spent with two (or more) signatures. Other cryptocurrencies such as ether and XRP are also capable of multi-signature transactions.
You can make your cryptocurrency holdings more secure with the use of multi-signature. Suppose you lose a private key, if the key is associated with a multi-signature wallet the funds cannot be spent unless the other private key is used. More importantly, multi-signature is very useful to businesses involved in cryptocurrency as it can provide an escrow service and prevent embezzlement.
There are various types of multi-signature addresses, with the most commonly used being:
- 2-of-2: both signatures are required to spend the funds (e.g., a joint savings account),
- 2-of-3: two of three signatures are required to spend the funds, (e.g., escrow services where buyer and seller both sign a transaction. A third party arbitrator can sign the transaction to refund the buyer if something goes wrong).
- 3-of-5: three of five signatures are required to spend the funds, (e.g., five trusted people hold the key to some funds, say an exchange or a charity. Three people are required to sign a transaction to move funds, reducing any risks of one person running away with the money.)
With a 2-of-2 multi-signature address you can increase the security of your cryptocurrency holdings. However, a 2-of-3 address is just as useful in protecting yours bitcoins from thieves from stealing your bitcoins, but you can also access your coins if you lose or forget one of the keys.