Using multi-signature self-custody arrangements can be confusing for newcomers to the space and those interested in setting up inheritance structures. In this post I talk about a useful way to conceptualize multisig
In a multi signature (“multi-sig”) custody arrangement you have multiple signing devices that are required to spend bitcoin from a specific address (UTXO). Have you ever seen movies where the president is thinking about launching nuclear missiles and high ranking generals walk into the room with keys around their necks, insert them into key holes,and turn them in unison? This is the same concept.
Multi-sig arrangements are denoted as N of M arrangements, where N is the number of keys required to spend the bitcoin, and M is the total number of viable keys that can be used. In the diagram below there are three multi-sig arrangements shown.
- In the first diagram, only one of Alice, Bob, or Charlie is required to spend the Bitcoin.
- In the second diagram, two of these individuals is required.
- In the last diagram, all three of the individuals need to agree in order to spend the Bitcoin.
How do I know the right Arrangement?
The key to conceptualizing multi-sig arrangements is this:
How many bad actors can you tolerate?
When we think about bad actors, these are people who may seek to compromise the Bitcoin or go against the collective wishes of the remaining signatories. A bad actor can also be a “compromised key”, where someone in the group has their key stolen.
Bad actors in a multi-sig arrangement, if succesfull, can do one of two things:
- Spend Bitcoin
- Prevent Bitcoin from being spent.
In any N of M multi-sig arrangment, you can tolerate N-1 bad actors before the Bitcoin is spent. Examples:
- In a 1 of 3 arrangement, you can tolerate 0 bad actors because if one person goes rogue all the bitcoin can be spent.
- In a 2 of 3 arrangement you can tolerate 1 bad actor without the bitcoin being spent. If you get two bad actors then the bitcoin will be spent.
- In a 3 of 3 arrangment you can tolerate 2 bad actors.
- Note that in a 3 of 3 arrangement (or any arrangement where N = M), a single bad actor can prevent Bitcoin from being spent if it’s the wishes of all the other signatories to spend it.
Only the individual can determine the arrangement that is right for them. There are many permutations and combinations, each with their own risks and benefits that will be unique to your own situation.