Crypto transactions are approved through blockchain technology – a distributed ledger that records and verifies transactions across multiple computers, thus eliminating the need for intermediaries. Whenever a transaction is initiated, it is broadcast to the network of computers (nodes) that maintain the blockchain. 

The process of approving the transaction typically involves two key steps: validation and confirmation. During the validation phase, nodes verify the authenticity of the transaction, ensuring that the sender has sufficient funds and that the transaction adheres to the network's predefined rules. Once the transaction gets validated, it awaits confirmation. Private keys play a crucial role in securing and approving crypto transactions by providing proof of ownership and enabling cryptographic authorization.

There are typically 2-3 types of wallets offered to secure digital assets (depending on who you ask): cold, warm or hot wallets. However how each of those wallets functions to enable their owners to initiate transactions varies based on the approval setup integrated into the wallet.

In this article, we explore three key processes that crypto wallets run on to secure and approve transactions: single-signature wallets, multi-signature (multisig) wallets, and multi-party computation (MPC) wallets.

Single-signature wallets 

Single-signature wallets are the simplest and most commonly used type of crypto wallets. Single signature refers to a single private key associated with a user's address, which gives them complete control over their funds. When initiating a transaction, their private key serves as proof of ownership and authorization to sign the transaction. 

As the simplest type of crypto wallets, single-signature wallets make it easily accessible to individual users with relatively small volumes of digital assets to transact. Their setup allows for quick decision-making, is straightforward, and provides an attractive ownership component without needing to rely on external parties. 

However, single-signature wallets are highly vulnerable to hacks as their reliance on a single private key creates a single point of failure. If the private key is compromised, this leaves the user’s wallet open to unauthorized access.. Additionally, in case of key loss or accidental deletion, all digital assets stored in a single-signature wallet may become permanently inaccessible. 

Multi-signature (multisig) wallets 

Multisig wallets require a specific number of signers to collectively sign a transaction with their respective private keys in order to approve it. For instance, a common implementation is the 2-of-3 multisig where three participants generate their own keys, and any transaction must be approved by at least two of them. The signatures are then combined, and the aggregated signature is verified by the network to authenticate the transaction.

This signing process mitigates the risk of a single point of failure by distributing control among multiple signers, providing an additional layer of security as those signers must come together to authorize the transaction, such as a 2-of-3 or 3-of-5 quorum.  This type of consensus-based decision-making is better suited for organizations with needs of shared control.

That said, due to their dependency on multiple parties, multisig wallets can be slower to process transactions, and if a signer loses their private key, the remaining signers may face difficulties recovering funds.

What is multi-party computation?

Multi-party computation (MPC) is a cryptographic technique that allows multiple participants to collectively sign transactions without exposing their private keys. In MPC wallets, private keys are divided into multiple shares and distributed among the participants. The combined signatures are then used to approve transactions securely.

Similar to multisig, MPC enhances security by distributing the computational and cryptographic operations across multiple participants. By eliminating the reliance on a single party with complete access to sensitive information, MPC reduces the risk of a single point of failure or compromise. One area where Multi-Party Computation (MPC) outperforms multisig is in preserving privacy by enabling multiple participants to jointly compute results without revealing their individual inputs. With MPC, no single participant has access to the complete private key, thereby ensuring complete confidentiality. 

The computational overhead involved in MPC transactions, however, can also result in slower transaction speeds compared to other wallet types.

Overview of considerations for each type of cryptographic signatures

All in all, private keys play a fundamental role in all types of wallets, serving as the foundational means to authorize transactions. While each type of approval process suits diverse needs and user types, MPC technology ensures the highest level of security and scalability to remove any single point of failure and provides institutions with peace of mind that their crypto assets are kept secure.

How Ceffu secures its clients’ assets

Ceffu's institutional-grade custody solutions are powered by the cutting-edge technology of multi-party computation. Our distributed storage key management process stores key shares on air-gapped, FIPS 140-2 devices distributed across different geographical regions, ensuring the utmost security measures are in place to protect our clients' assets.

For more information on Ceffu’s custody services and other relevant questions, please contact our team of account managers by filling out our institutional form.