What is a Multi-Sig?
Multi-sig is short for multi-signature wallet, which is a crypto wallet that can require multiple keys to sign a transaction before it can be executed. In our Primer on DAOs, we introduced multi-sigs as a vital component of a DAO toolkit. Many DAOs that share a treasury and/or income among a core team make use of multi-sigs to enhance decentralization and enable the trustless distribution of DAO resources.
This article offers a more in-depth look at what multi-sigs are, how they work, and some examples of when a multi-sig is a helpful way to manage funds.
How Does a Multi-Sig Work?
Multi-sigs are wallet addresses that can receive and hold tokens, both fungible and non-fungible, just like single-key wallets (your personal wallets are likely single-key wallets, meaning only one key is ever able to approve a transaction from that wallet).
What sets multi-sigs apart from single-key wallets is that you can add a number of “owners” to a multi-sig, and then require a minimum number of those owners to approve a transaction before it can occur. The “owners” that are added to multi-sigs are actually other wallet addresses, meaning that you can add multiple wallets run by a single person, or multiple wallets that are each controlled by a different person.
During multi-sig set-up, you must also specify the number of owners that will be required to approve transactions that are made from that mult-sig. This set-up is commonly expressed as M of N; ie, 1 of 3 owners are required to approve transactions, or 3 of 5 owners, or 2 of 4, and so on. How you set-up the multi-sig approvals will depend on the specific needs of your DAO or organization. Note that you can also change how many approvals are required, if necessary.
Benefits of Using a Multi-Sig
There are many benefits to managing a budget or treasury using a multi-sig. These benefits largely fall under 3 categories: security, decentralization, and efficiency.
The security benefits that come with multi-sigs are pretty straightforward. If you are managing assets with a group of people, requiring multiple owners’ approval means that funds held in a multi-sig are harder to hack; there is more than one potential point of failure. Additionally, if one multi-sig owner loses access to their wallet (loses their seed phrase or hardware wallet, for example), the assets shared through the multi-sig are not also lost.
A thoughtful multi-sig set-up can ensure your organization’s treasury is adequately decentralized. This means that control over your treasury is spread out among a few different people, rather than being entirely under the control of one individual. Distributing trust among several wallets also means asset custody is not something your organization has to worry about. One of the best things about operating a DAO or organization in a “trustless” manner is that the time you would otherwise spend thinking about who has control over your assets can instead be spent on advancing your organization’s goals.
Finally, a major upside of using a multi-sig to manage assets is that it can be very efficient. Instead of requiring centralized approval & disbursement for every expenditure, the way funding flows in a traditional organization, web3 community members can be empowered to spend money for events and initiatives on behalf of their organization as they see fit, so long as they coordinate the required number of owners to sign the transaction.
For large organizations with big treasuries, another way to use multi-sigs to enhance organizational efficiency is to set up multiple multi-sigs for different departments who manage small portions of your budget. For example, at Zapper, instead of requiring our community team to request a disbursement everytime we need to fund an event or pay a Learn contributor, we share a multi-sig from which our community team is empowered to pay contributors or tip community members as needed. This multi-sig is topped up every month, an additional security measure which ensures there is only ever a small amount of funds in there.
When considering a multi-sig for your organization, thinking about what degree of decentralization you require, how secure you want your funds to be, and how efficiently you want owners to be able to distribute assets can help you decide what kind of set-up will work best.