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A multi-signature address is an address that is associated with more than one ECDSA private key. The simplest type is an m-of-n address - it is associated with n private keys, and sending bitcoins from this address requires signatures from at least m keys. A multi-signature transaction is one that sends funds from a multi-signature address.

The primary use case is to greatly increase the difficulty of stealing the coins. With a 2-of-2 address, you can keep the two keys on separate machines, and then theft will require compromising both, which is very difficult - especially if the machines are as different as possible (e.g., one pc and one dedicated device, or two hosted machines with a different host and OS).

It can also be used for redundancy to protect against loss - with a 2-of-3 address, not only does theft require obtaining 2 different keys, but you can still use the coins if you forget any single key. This allows for more flexible options than just backups.

It can also be used for more advanced scenarios such as an address shared by multiple people, where a majority vote is required to use the funds.

Multi-signature transactions are often conflated with BIP 16 and 17. In fact they are not directly related. Multi-signature transactions have been supported by the protocol for a long time; but implementing them would require a special output script.

What BIP 16/17 do is offer a standard way to encapsulate a script within an address; this makes it easier to use advanced scripts, with the most prominent example being multi-signature transactions.

Enjoy!

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"BIP 16 / 17 in layman's terms"

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Multisig have lots of uses, wallet sharing, increased security and escrow to say the first that come to mind.

Increased security: 2FA purposes or even help provide services like double spend prevention and instant confirmation.

If you want to try an open source wallet with all these features in action try https://greenaddress.it

It allows you to smoothly create P2SH Multisig transaction but with a simple intuitive interface that hides all the complexity.

An example applying a Multi-Signature transaction in the hospitality industry!

The transactions of this form demand the assumption that from N public keys which remain stored in the Locking Script, at least M (N≥M) from these must create valid signatures, which are found on Unlocking Script, in order the amount of bitcoins to be transferred to the wallet and the bitcoins to be spendable afterwards.

This procedure of authentication essentially is happening for keeping the funds secure which are stored in a Multi-Signature address of a digital wallet and not to be feasible to be spent by anyone who has access to the wallet. This procedure depends on the scheme M-of-N. Therefore, in order someone who wants to create a Bitcoin Multi-Signature address needs the combination of several private keys. This specification is visible also in the morphology of this kind of addresses as these addresses are not starting with the number 1 as usual, but with number 3. Let’s see an example for clarification.

Imagine that the last class of a high school in Thessaloniki (Greece) wants to travel for educational purposes for one week (6 nights) to Barcelona (Spain). The school is going to stay in the “Hotel X ”. The hotel accepts bitcoin payments and has a policy that for charges above 5000 euros ≈ 9,29 BTC (26/9/92016) the funds must be stored in a Multi-Signature address owned by the hotel. The school is going to pay for the reservation 10,800 euro≈ 20,06 BTC in total (60 students * 6 nights * 30 euros/night). So, the wallet of the school has to form a Multi-Signature transaction in order to pay.

The administration of the hotel has decided that in order the hotel to take advantage of the funds above 5000 euros the transaction must be signed at least by 2 out of 3 signatures of the below authorized recipients :

• Mary (Financial Controller)

• Pedro (IT Administrator)

• Adriano (CFO)

So, the scripts of this special transaction will look like:

• Locking Script enter image description here

Scheme 1: Locking Script of a Multi-Signature Transaction

• Unlocking Script

enter image description here

Scheme 2: Unlocking Script of a Multi-Signature Transaction

• Validation Script

enter image description here

Scheme 3: Validation Script of a Multi-Signature Transaction

Finally, in our example Pedro and Adriano have to sign with their private keys in order the hotel to be able to spend in the future the amount of bitcoins stored in this transaction.

*All the names used incidentally for the purpose of the example.

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