Litecoin [LTC]: Defined in CryptoCurrency

Litecoin [LTC]:

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What Is Litecoin?

Litecoin is a cryptocurrency that was founded in 2011, two years after bitcoin, by a former Google engineer named Charlie Lee. Measured by market capitalization, Litecoin is the ninth-largest cryptocurrency.

Initially, it was a strong competitor to bitcoin. However, as the cryptocurrency market has become more saturated in recent years with new offerings, Litecoin's popularity has waned.

Litecoin has always been viewed as a reaction to bitcoin. In fact, when Lee announced the debut of Litecoin on a popular bitcoin forum, he called it the "lite version of Bitcoin."1 For this reason, Litecoin has many of the same features as bitcoin, while also adapting and changing some other aspects that the development team felt could be improved.

KEY TAKEAWAYS

• Litecoin is a cryptocurrency that was founded in 2011, two years after bitcoin, by a former Google engineer named Charlie Lee.
• Litecoin can be used as an avenue for paying people anywhere in the world without an intermediary having to process the transaction. 
• Measured by market capitalization, Litecoin is the ninth-largest cryptocurrency.
• There will never be more than 84 million Litecoins in circulation.
• On April 17, 2021, the value of one Litecoin was $310.73.

Understanding Litecoin

Like other decentralized cryptocurrencies, Litecoin is not issued by a government, which historically has been the only entity that society trusts to issue money. Instead of being regulated by a central bank and coming off the press at the Bureau of Engraving and Printing, Litecoins are created by an elaborate cryptocurrency procedure called mining, which consists of processing a list of Litecoin transactions.

Unlike traditional currencies, the supply of Litecoins is fixed. There will never be more than 84 million Litecoins in circulation. Every 2.5 minutes, the Litecoin network generates a new block–a ledger entry of recent Litecoin transactions throughout the world.2 3

The block is verified by mining software and made visible to any system participant (called a miner) who wants to see it. Once a miner verifies it, the next block enters the chain, which is a record of every Litecoin transaction ever made.3

There are incentives for mining Litecoin: the first miner to successfully verify a block is rewarded with 12.5 Litecoins.4 The number of Litecoins awarded for such a task reduces with time. In August 2019, it was halved, and the halving will continue at regular intervals until the 84,000,000th Litecoin is mined.5

Mining cryptocurrency at a rate worthwhile to the miners requires a huge amount of processing power, courtesy of specialized hardware. The central processing unit in most personal computers isn’t fast enough to mine most cryptocurrencies. However, Litecoin can be differentiated from the majority of other cryptocurrencies because it can be mined with personal computers.3 Although the greater a machine’s capacity for mining, the better the chance it’ll earn something of value for a miner.

Any currency–even the U.S. dollar or gold bullion–is only as valuable as society thinks it is. If the Federal Reserve started circulating too many banknotes, the value of the dollar would plummet in short order. This phenomenon transcends currency. Any good or service becomes less valuable the more readily and cheaply available it is. The creators of Litecoin understood from the start that it would be difficult for a new currency to develop a reputation in the marketplace. But by restricting the number of Litecoins in circulation, the founders could at least allay people’s fears of overproduction.

The Litecoin Foundation estimates that it will be around 2142 when the maximum of 84 million Litecoins will be reached.6

How Is Litecoin Different than Bitcoin?

The most important distinction between Litecoin and Bitcoin is the different cryptographic algorithms that they employ. Bitcoin uses the SHA-256 algorithm, whereas Litecoin makes use of a newer algorithm, called scrypt.7

Litecoin has some inherent advantages when compared to bitcoin. It was founded with the goal of prioritizing transaction speed, and this is a major reason for its popularity. The bitcoin network’s average transaction confirmation time is currently just under nine minutes per transaction, while Litecoin's is roughly 2.5 minutes. Litecoin's network can handle more transactions because of its shorter block generation time.83

Bitcoin has a significantly greater market capitalization than Litecoin. As of April 21, 2021, the total value of all bitcoins in circulation is around $1 trillion, while the market capitalization of Litecoin is around $18.3 billion. Bitcoin's market capitalization still dwarfs all other digital currencies.9

Both bitcoin and Litecoin have fixed supplies. However, bitcoin's supply is limited to only 21 million coins, while Litecoin's total fixed supply is 84 million coins.1

Goals of Litecoin

Litecoin, like all virtual currencies, is a form of digital money. Both individuals and institutions can use Litecoin to purchase things and to transfer funds between accounts. Participants can make transactions with Litecoin without the use of an intermediary like a bank, credit card company, or payment processing service.

 

Rather than focusing on its functionality, many investors are interested in Litecoin as a potential long-term holding. Similar to investments in any type of currency, investors are speculating that Litecoin will build relative wealth over time.

Litecoin FAQs

What Is Litecoin and How Does It Work?

Litecoin is a peer-to-peer virtual currency, which means it is not governed by a central authority. Litecoin's network offers instant, near-zero cost payments that can be conducted by individuals or institutions across the globe. Bitcoin, Litecoin, and many other cryptocurrencies use the proof-of-work (PoW) algorithm in order to secure their networks. Basically, PoW requires that one party proves to all the other participating parties in the network that a required amount of computational effort has been expended.

What Is Litecoin Used For?

Litecoin can be used as an avenue for paying people anywhere in the world without an intermediary having to process the transaction. 

What Is the Highest Litecoin’s Price Has Been?

On April 17, 2021, the value of Litecoin was $310.73. Previously, the coins high was $237.57, which had been reached in December 2017.10

When Was Litecoin’s Last Halving?

Like bitcoin, the creation of Litecoin tokens involves a process called mining. For participating in the act of mining, miners are rewarded with Litecoin. A Litecoin halving refers to an instance of halving the amount of Litecoin rewards that miners are given for each block.

Litecoin halvings aim to preserve Litecoin’s purchasing power. The last Litecoin halving took place on August 5, 2019. On this date, the mining reward was reduced from 25 Litecoins per block to 12.5 Litecoins per block.11



How Many Litecoins Are Left?

There will ultimately only be 84 million Litecoins in circulation. In. October 2020, there were 66,134,058 Litecoins in circulation.12

The Bottom Line

Once a currency reaches a critical mass of users who are confident that the currency is indeed what it represents and probably won’t lose its value, it can sustain itself as a method of payment. Litecoin isn’t anywhere near universally accepted. But as cryptocurrencies become more readily accepted and their values stabilize, one or two of them–possibly including Litecoin–will emerge as the standard currencies of the digital realm.

Investing in cryptocurrencies and other Initial Coin Offerings (“ICOs”) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author does not own Litecoins.

Lisk: Defined in CryptoCurrency

Lisk: Defined in CryptoCurrency

Lisk is a cryptocurrency built on a blockchain with programming abilities built into it. 

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What is the Lisk SDK?

The Lisk SDK is designed to provide an easy and reliable software development kit for building blockchain applications which are compatible with the Lisk Protocol.

The codebase is written entirely in JavaScript and TypeScript, which is highly beneficial for the majority of developers, as no significant change of tools are required to get started.

The Lisk SDK makes every effort to ensure developers are easily able to focus purely and simply on writing the code that is required for their own blockchain application and nothing else.

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Table of Contents

• The Lisk SDK ecosystem
• SDK components
• Usage
  • Dependencies
  • Installation
• Getting started
  • Quickstart
  • Tutorials
  • The Lisk protocol
  • Architecture
  • How-To Guides

The Lisk SDK ecosystem

The Lisk SDK operates on the Node.js runtime and consists primarily of an application framework (Lisk Framework). This consists of a collection of libraries providing blockchain application functionalities (Lisk Elements), and a powerful Command Line Interface (Lisk Commander), which allows developers to manage a Lisk node instance and interact with a Lisk compatible network.

A detailed explanation regarding the underlying architecture of the Lisk Framework is described at Architectural overview

SDK components

Directory	Description
Framework	Lisk Framework is an application framework responsible for establishing and maintaining the interactions between the modules of a Lisk blockchain application.
Elements	Lisk Elements is a collection of libraries, each of them implementing some form of blockchain application functionality such as cryptography, transactions, p2p, etc. Each library is designed to be compatible with the Lisk Protocol.
Commander	Lisk Commander is a command line tool which allows the management of a Lisk node instance and interaction with a Lisk compatible network.

Usage

Dependencies

The following dependencies need to be installed to run the Lisk SDK:

Dependencies	Version
Node.js	v12 (latest)

Installation

Installation of the Lisk SDK is straightforward and only requires getting a single NPM package lisk-sdk, to your Node.js project as shown below:

npm install lisk-sdk

Lisk SDK is an all-in-one package that provides the tools to create, run and maintain blockchain applications in JavaScript.

In the case whereby only a specific functionality is required, it is possible to install only the relevant package as shown below:

npm install lisk-commander 
npm install @liskhq/lisk-client 

	Install Lisk Commander.
	Install Lisk Elements client package.

View the full list of Lisk Elements’ packages

Getting started

To get started with the Lisk SDK and the development of a blockchain application, please refer to the following sections in the documentation:

Quickstart

The quickest way to bootstrap a blockchain application with the Lisk SDK is described on the Quickstart page.

Tutorials

The Tutorials explain in detail how to build a specific blockchain application. All examples provided in the tutorials describe how to implement simple, but valid industry use cases.

The tutorials overview page provides an informative overview about all existing tutorials, including the estimated time and the skill level required to complete each specific tutorial.

All code for the example apps that is used in the tutorials is also available in the lisk-sdk-examples repository on GitHub.

The Lisk protocol

The Lisk protocol is the set of rules followed by a blockchain created with the Lisk SDK using the default configuration. It contains various development-agnostic specifications about the Lisk SDK.

It is a good location to look up certain topics in order to gain a deeper understanding, or to further explore the SDK in a scientific direction.

Architecture

The architecture pages contain various explanations about the architecture of the Lisk Framework.

It contains the following chapters:

• Architectural overview

  • On-chain architecture

  • Off-chain architecture

  • Communication Architecture

How-To Guides

The development guides are dedicated how-to guides which cover specific topics required to build a blockchain application with the Lisk SDK.

The most relevant guides for beginners are:

• Starting a blockchain application

• Configuring a blockchain application

• Creating a custom module

• Creating a custom asset

• Communicating with a frontend

Margin Trading: Defined in CryptoCurrency

Margin Trading: Defined in CryptoCurrency

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What Is Margin Trading?

Intermediate:
Margin trading is a method of trading assets using funds provided by a third party. When compared to regular trading accounts, margin accounts allow traders to access greater sums of capital, allowing them to leverage their positions.
Essentially, margin trading amplifies trading results so that traders are able to realize larger profits on successful trades. This ability to expand trading results makes margin trading especially popular in low-volatility markets, particularly the international Forex market. Still, margin trading is also used in stock, commodity, and cryptocurrency markets.

In traditional markets, the borrowed funds are usually provided by an investment broker. In cryptocurrency trading, however, funds are often provided by other traders, who earn interest based on market demand for margin funds. Although less common, some cryptocurrency exchanges also provide margin funds to their users.


How does margin trading work(?): 
When a margin trade is initiated, the trader will be required to commit a percentage of the total order value. This initial investment is known as the margin, and it is closely related to the concept of leverage. In other words, margin trading accounts are used to create leveraged trading, and the leverage describes the ratio of borrowed funds to the margin. For example, to open a $100,000 trade at a leverage of 10:1, a trader would need to commit $10,000 of their capital.

Naturally, different trading platforms and markets offer a distinct set of rules and leverage rates. In the stock market, for example, 2:1 is a typical ratio, while futures contracts are often traded at a 15:1 leverage. In regards to Forex brokerages, margin trades are frequently leveraged at a 50:1 ratio, but 100:1 and 200:1 are also used in some cases. When it comes to cryptocurrency markets, the ratios are typically ranging from 2:1 to 100:1, and the trading community often uses the ‘x’ terminology (2x, 5x, 10x, 50x, and so forth).

Margin trading can be used to open both long and short positions. A long position reflects an assumption that the price of the asset will go up, while a short position reflects the opposite. While the margin position is open, the trader’s assets act as collateral for the borrowed funds. This is critical for traders to understand, as most brokerages reserve the right to force the sale of these assets in case the market moves against their position (above or below a certain threshold).

For instance, if a trader opens a long leveraged position, they could be margin called when the price drops significantly. A margin call occurs when a trader is required to deposit more funds into their margin account in order to reach the minimum margin trading requirements. If the trader fails to do so, their holdings are automatically liquidated to cover their losses. Typically, this occurs when the total value of all of the equities in a margin account, also known as the liquidation margin, drops below the total margin requirements of that particular exchange or broker.


Advantages and disadvantages:
The most obvious advantage of margin trading is the fact that it can result in larger profits due to the greater relative value of the trading positions. Other than that, margin trading can be useful for diversification, as traders can open several positions with relatively small amounts of investment capital. Finally, having a margin account may make it easier for traders to open positions quickly without having to shift large sums of money to their accounts.

For all its upsides, margin trading does have the obvious disadvantage of increasing losses in the same way that it can increase gains. Unlike regular spot trading, margin trading introduces the possibility of losses that exceed a trader's initial investment and, as such, is considered a high-risk trading method.

Depending on the amount of leverage involved in a trade, even a small drop in the market price may cause substantial losses for traders. For this reason, it's important that investors who decide to utilize margin trading employ proper risk management strategies and make use of risk mitigation tools, such as stop-limit orders.


Margin trading in cryptocurrency markets:
Trading on margin is inherently riskier than regular trading, but when it comes to cryptocurrencies, the risks are even higher. Owing to the high levels of volatility, typical to these markets, cryptocurrency margin traders should be especially careful. While hedging and risk management strategies may come in handy, margin trading is certainly not suitable for beginners.
 
Being able to analyze charts, identify trends, and determine entry and exit points won't eliminate the risks involved with margin trading, but it may help to better anticipate risks and trade more effectively. So before leveraging their cryptocurrency trades, users are recommended first to develop a keen understanding of technical analysis and to acquire an extensive spot trading experience.


Margin funding:
For investors who do not have the risk tolerance to engage in margin trading themselves, there is another way to profit from the leveraged trading methods. Some trading platforms and cryptocurrency exchanges offer a feature known as margin funding, where users can commit their money to fund the margin trades of other users.

Usually, the process follows specific terms and yields dynamic interest rates. If a trader accepts the terms and takes the offer, the funds' provider is entitled to repayment of the loan with the agreed-upon interest. Although the mechanisms may differ from exchange to exchange, the risks of providing margin funds are relatively low, owing to the fact that leveraged positions can be forcibly liquidated to prevent excessive losses. Still, margin funding requires users to keep their funds in the exchange wallet. So, it is important to consider the risks involved and to understand how the feature works on their exchange of choice.


Closing thoughts:
Certainly, margin trading is a useful tool for those looking to amplify the profits of their successful trades. If used properly, the leveraged trading provided by margin accounts can aid in both profitability and portfolio diversification.

As mentioned, however, this method of trading can also amplify losses and involves much higher risks. So, it should only be used by highly skilled traders. As it relates to cryptocurrency, margin trading should be approached even more carefully due to the high levels of market volatility.

Moore’s Law: Defined in CryptoCurrency

Moore’s Law: Defined in CryptoCurrency

Moore's law, explained:  

According to him, the number of transistors on microchips — the fundamental building blocks of electronic devices — will double roughly every two years while their production costs will stay the same or even go down.

Moore’s Law is an observation that computer technology becomes quicker and smaller with time.

This observation was first made by Gordon Moore in 1965. Gordon, a co-founder of the computer company Intel, found that the number of transistors (an electronic device that controls the flow of electricity) in one square inch doubles every year.

Influence of Moore's law on blockchain technology:

Gordon Moore, the co-founder of Fairchild Semiconductor and Intel, observed that the number of components per electrical integrated circuit would grow by at least a factor of two for every year. Back in 1965, he also projected that this rate of growth would continue for at least another decade. Over the years, he revised the forecast to doubling every two years. This observation was geared toward the number of transistors in a dense integrated circuit, and has been used in the semiconductor industry to set targets for research and development. But it isn't only limited to the chip-manufacturing field; it has also been used to make observations about technological and social change, as well as productivity and economic growth.

Moore's law has been adapted and applied to approximate the rate of change in network capacity, pixels in images, storage device size, and much more. Blockchain is a technology of the future that might have to overcome multiple limitations in order to achieve healthy long-term development. Moore's law would help in deciding the complexity required for any blockchain application so that the application doesn't have to struggle with future scalability issues.

Since every node in the network maintains the complete blockchain ledger, blockchain data keeps increasing in size as time goes on. This raises some concerns regarding scalability, as each node needs to maintain the blockchain locally (such is the nature of the distributed network). Satoshi Nakamoto had mentioned that the growth of the block header size would be around 4.2 MB per year, and Moore's law would guarantee growth of at least 1.2 GB RAM (in 2008) per year, which should not pose any problems for block storage even if they are maintained in node memory.

Public blockchains, such as Bitcoin, have to deal with the hash rate of the hardware for their consensus algorithms. Bitcoin-mining hardware has been able to keep up with Moore's law, providing the required hash rate in accordance with the growing difficulty rate. However, the future of Bitcoin mining relies on Moore's law and the hardware being able to keep up with the difficulty without causing much loss to the miners.

Including Moore’s Law:Its Impact on Cryptography: 

In the ever-evolving landscape of technology, few concepts have had as profound an impact as Moore’s Law. Coined by Gordon Moore, the co-founder and emeritus chairman of Intel Corporation in 1965, this fundamental principle predicts the exponential growth of computing power over time.

According to Moore’s Law, the number of transistors on microchips, which serve as the bedrock of electronic devices, will double approximately every two years. Even more intriguing, this growth occurs while the production costs remain constant or even decrease.

In this comprehensive article, we delve into the intricate connection between Moore’s Law and cryptography, exploring the positive and negative impacts it has on this critical field.

Moore’s Law: A Brief Overview: 

Moore’s Law is a guiding light in the realm of technology, driving innovation, and shaping the course of digital progress. It provides a roadmap for the remarkable improvements in the computing industry, facilitating the creation of smaller, more powerful, and energy-efficient electronic products.

This monumental growth in processing capacity has far-reaching implications, affecting not only the field of cryptography but also industries such as entertainment and healthcare. Furthermore, it fuels economic growth through innovation, creating new markets and enhancing the effectiveness of existing ones.

Staying at the forefront of technology, in harmony with Moore’s Law, ensures a competitive edge in today’s dynamic marketplace.

Moore’s Law’s Impact on Cryptography: 

The influence of Moore’s Law on cryptography is multifaceted, offering both opportunities and challenges to this critical field.

Positive Impact: 

Cryptographers harness the increasing processing capabilities enabled by Moore’s Law to craft more advanced and robust encryption methods. This entails the development of encryption algorithms with larger key lengths and intricate mathematical operations, rendering it exceedingly difficult for potential attackers to decrypt data.

The positive consequence of these advancements is not limited to heightened security alone; it also bolsters cyber threat defense, safeguarding sensitive data in an ever-evolving digital landscape.

Negative Impact:

However, the rapid rise in processing power also benefits potential adversaries, reducing the time required to break encryption keys and diminishing data security. Cryptographic techniques once considered secure may become outdated more swiftly, necessitating continuous adaptation and innovation in the field of cryptography to withstand technological advancements.

Moore’s Law and Blockchain Technology:

Blockchain technology, a cornerstone of the digital revolution, is not immune to the profound effects of Moore’s Law. While it brings the promise of scalability, security, and energy efficiency, it also poses challenges that demand attention.

Moore’s Law’s constant doubling of computing power underpins the expansion of blockchain networks, allowing them to support higher transaction volumes and larger data sets. This growth paves the way for more secure cryptographic methods and robust encryption techniques, enhancing blockchain security.

Concurrently, the drive towards energy efficiency, driven by Moore’s Law, holds the potential to reduce the environmental impact of blockchain networks, favoring blockchain stability.

However, Moore’s Law presents challenges such as the potential centralization of blockchain networks. On the flip side, the increasing storage capacity, a direct result of Moore’s Law, empowers blockchain technology to transcend its role as a mere cryptocurrency platform, accommodating complex and multifaceted applications like smart contracts and comprehensive transaction histories.

Moore’s Law and Cloud Computing:

Moore’s Law has played a pivotal role in shaping the landscape of cloud computing, democratizing access to powerful computing resources.

The relentless expansion of server capabilities driven by Moore’s Law has allowed cloud providers to offer increasingly potent virtual machines and cost-effective data storage. This transformation has broadened the scope of cloud computing, making it accessible for a plethora of applications, including data storage, processing, machine learning, and artificial intelligence.

However, this increased processing power has also underscored the critical importance of data security and privacy. More potent hardware has led to more sophisticated cyber threats, necessitating enhanced encryption and security measures to protect sensitive data in the cloud.

Moore’s Law in 2023 and Beyond:

Even as the world of technology undergoes rapid transformations, Moore’s Law remains a driving force behind innovation. While the original theory has evolved in practice, with some experts suggesting it no longer accurately captures the pace of semiconductor technology advancement, its underlying principles of continuous technical growth and innovation persist.

From the perspective of cryptocurrencies and blockchain technology, Moore’s Law continues to play a pivotal role. It has empowered the development of more robust cryptographic algorithms, lengthier key sizes, and innovative security measures to counteract potential threats.

To maintain data protection and uphold blockchain integrity, cryptocurrencies have adapted to the shifting landscape, embracing advanced encryption standards and longer key lengths.

In conclusion, the relevance of Moore’s Law is contingent on one’s understanding of its original formulation. In a world where technological growth remains paramount, even if the exact doubling of transistor count may have moderated, the pursuit of more potent, energy-efficient, and inventive computing technology endures.

The world of cryptography and blockchain technology, in particular, is poised to embrace the opportunities and address the challenges posed by Moore’s Law as they chart the course for the future of digital security and innovation.

Multisignature: Defined in CryptoCurrency

Multisignature: Defined in CryptoCurrency

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What is a MultiSig wallet?

A multisig wallet is a wallet that provides users with extra security because it requires multiple unique signatures (hence multi-signature) to authorize and execute a transaction. A traditional — or single-sig — Bitcoin wallet contains a Bitcoin address, each with one associated private key that grants the keyholder complete control over the funds.

With bitcoin multisignature addresses, you can have a Bitcoin address with three or more associated private keys, such that you need any two of them to spend the funds. A wallet’s private key grants access to a user’s funds. It proves ownership of your bitcoin and is necessary to execute transactions in combination with a public key. If a private key is lost, all funds are lost, and there is no way to recover them. Spreading access to a wallet across multiple keys is a safer measure.

Multisig is not native to Bitcoin. The concept has been used in the banking sector for years and previous to that it had been used for thousands of years to protect the security of crypts holding the precious relics of saints. The superior of a monastery would give monks only partial keys for gaining access to the precious relics. Thus, no single monk could gain access to and possibly steal the relics.

Single-key vs Multisig

Most Bitcoin wallets use a single signature setup. This type of setup only requires one signature to sign a transaction. Single-key addresses are easier to manage as access to funds is faster. Still, they also represent a single point of failure increasing risks for your security since hackers and malicious actors could more easily access them.

Single-key wallets are good options for small and faster transactions — like face-to-face payments — but are not recommended for individuals and businesses who need to store considerable amounts of bitcoin. Like with cash, if you lose access to your single-key wallet, your funds are gone and there’s nothing you can do to recover them.

A multisig wallet, on the other hand, is configured in a way that requires a combination of keys from different sources to be operational — for example, 2-of-3, meaning that transactions can only be executed if at least 2 keys out of 3 are used.

Different variations exist, with a combination of signatures required to access funds and execute transactions. Some solutions demand that all the private keys are used to create the signature and authorize a transaction for maximum security.

Multisig solutions are not new to bitcoin. The concept was first pioneered and formalized into the standard Bitcoin protocol as early as 2012 but only started getting traction in 2014 after the shutdown of the Silk Road and the collapse of the bitcoin exchange Mt.Gox. The two adverse events urged developers to promote a better way to obtain maximum security against hacks and confiscation by authorities.

Why use a multisig wallet?

There is an increasing practice among businesses to store their bitcoin as a reserve asset in multisig wallets, as solely relying on one person to preserve the private key could turn out to be a regrettable mistake for the security of the funds. By using a multisig wallet, users can prevent the problems caused by the loss or theft of a private key. So even if one of the keys is compromised, the funds are still safe.

Multiple signatures required to authorize a transaction make it more difficult for someone to steal your bitcoin since they would need access to all of your private keys to get hold of your funds.

Imagine any individual or business entity creating a 2-of-3 multisig address and storing each private key in a different physical place and device, like a mobile phone, a laptop and a tablet. If one of the locations is accessed by malicious actors, the device located there is stolen, and even if the wallet is compromised, the attackers won’t be able to spend the funds using only that one key they found.

In the same way, phishing and malware attacks are more easily prevented because the attackers can’t do much with one single key at their disposal.

Besides malicious attacks of any nature, users can still access their bitcoin using their other 2 keys if they lose their private key. Multisig wallets are indeed a passport to more peace of mind with your funds.

How does a multisig wallet work?

The process to initiate a transaction with a multisig wallet follows the same steps regardless of the type of solution chosen. The user will input the transaction’s details in the wallet and enter their private key to sign it. The transaction will be pending and only finalized — and the funds sent to the correct address — once all the required keys are submitted.

Example:

Step 1: Connect the hardware device to an existing wallet or create a new one;

Step 2: Wait for the wallet to recognize the hardware device and sign;

Connect a second hardware and proceed as above;

Connect the third wallet and sign as with the previous devices.

Step 3: To execute a transaction you will only need two of the 3 setup wallets above.

There’s no hierarchy in the private keys, only the number required to sign the transaction in no particular order matters. There is no expiration date in multisig transactions, which will remain pending until all the required keys are provided.

Types of multi-signature wallets

Depending on the number of private keys and signatures required to authorize a transaction, different types of multisig wallets can serve the purpose, which are highlighted below.

• * 1-of-2 Signatures: multisig wallets can be used to share funds among multiple users, with each party able to access the funds without needing another party to authorize the transaction.
• * 2-of-3 Signatures: when 2 out of 3 private keys are needed to authorize transactions, the wallet’s security is enhanced. This type of multisig wallet is frequently used by cryptocurrency exchanges to secure their hot wallets. They usually keep one private key online and one offline, with a security company storing the third one.
• * 3-of-5 Signatures: this type of custody requires two keys — ideally geographically separated — to be used to access funds and authorize a transaction, with a third party usually being a security company’s key that is also necessary to access the funds.
• * Collaborative Custody vs Self Custody: a collaborative custody solution is used when a separate company keeps custody of your funds while leaving you control over your private keys. However, they also possess a different private key to access the funds for enhanced security. A self custody solution that allows you to control all of your private keys, where you can spread the private keys across different devices and locations as you see fit.

Advantages of Multisig Wallets

Besides regular tips on how to protect your money — any money — online, you should use more precaution when it comes to bitcoin because malicious actors will exploit any vulnerability in your system to get hold of it. .

Increased Security

Firstly, multisig solutions prevent a single point of failure from occurring so that if you lose your private key, you won’t lose your funds because you rely on a safe backup of separate private keys stored on different devices and locations for easy access.

Multisig wallets ensure you are more protected from cyber-attacks, making it much harder for malicious actors to break your security that relies on multiple safety points, making them nearly impossible to compromise.

Escrow Transactions

When using a multisig wallet, you’re basically using an arbitrator — a trustless escrow — to finalize transactions. Although this may sound like having an intermediary, in contrast with Bitcoin's true ethos, there are a few differences to consider.

Firstly, this would be a voluntary choice that you make only by personally picking the escrow, which can be changed every time.

Secondly, the trust in the intermediary can be minimal as the chosen security entity cannot access your funds or get hold of them without your private key activation.

Two-Factor Authentication (2FA)

Multiple signatures act as the typical 2FA we use to access different services. Unless at least another signature authorizes the transaction, the funds cannot be accessed and spent. This solution is also recognized as a 2-of-2 multisig protocol, with the private keys kept on two different devices.

Co-operation between two parties

Multisig solutions are ideal for businesses because different individuals or groups can view balances, but to access and transfer the funds, they’ll need at least two sources — two private keys — to authorize the transactions.

Disadvantages of Multisig Wallets

Although multisig wallets represent an improved solution to security issues, they could be better. They have risks and limitations, including a gray area in the parties' legal responsibility in case something goes wrong.

Transaction Speed

Due to the reliance on multiple parties to authorize a transaction, one of the multisig wallets' crucial drawbacks is low transaction speed. Such an issue is easily overcome if a user keeps the funds needed for quick transactions in faster solutions like single-key hot wallets and leaves most of the bitcoin holdings that must be better protected in multisig wallets.

Technical Knowledge

Although there is plenty of educational material online to help you acquire the right skills for a smooth multisig experience, many people are intimidated by the technical knowledge required to configure a multisig solution. Bitcoin custodial companies that offer multisig wallets are usually very proactive in helping their customers set up their solutions quickly and effectively.

Fund Recovery and Custodial

Recovery of funds in multisig wallets might be tedious and intimidating for non-techie bitcoiners, as it requires the import of each recovery phrase on each different device, which may represent a challenge to even the most technically skilled users. However, this shouldn’t discourage people from using multisig as the prospect of losing their funds more easily from a single-key solution is more daunting.

Final Words

While multisig is a great way to protect your bitcoin and provides a greater sense of security and peace of mind, it could be better. You should understand bitcoin and wallets thoroughly before taking this next step of purchasing your own multisig. You may find our best multisig wallets guide helpful in your research. 

If you get past the inconvenience of setting up a multisig wallet and the technical learning required, multisig can help you achieve greater peace of mind with your bitcoin by adding an extra layer of security to your holdings.

With an overall figure of roughly 4 million bitcoin forever lost to hacks, malicious attacks and poor personal maintenance, it is more important than ever to protect your funds with the proper tools and knowledge. Despite a few disadvantages, multisig wallets offer reasonable solutions to businesses and individuals by requiring more than one signature to access and transfer funds.

The technology behind multisig has improved massively since its early usage and will likely see an increased application in the future, especially considering that risks of hacks and loss of funds are some of the issues that discourage people from investing in bitcoin. With better security, more adoption is likely to follow.

Whether or not you should be using multisig solutions depends on your needs and preferences. If a little inconvenience, slow transactions and technical requirements put you off, then a multisig wallet might not suit you. However, individuals, groups, companies and institutions that possess funds they can’t afford to lose, should use multisig without hesitation for advanced security.