Multisig wallets are a type of wallet that has more than 1 private key, which means more than one person / key is needed to sign. These can have two keys where both are needed, 3 keys where 2 out of the 3 are needed, etc etc you can have multiple co-signers.
There are a few examples about how these would be used. In an online wallet multiple key parts could be stored on different servers for security. For the average user though there are a few common types of Multisig wallet and there is no excuse not to use them, as Electrum offers this feature.
Electrum – This can be a Multisig or 2FA Wallet. The 2FA Wallet is the one we will discuss for this section as it is easy to use. When you set up a new wallet for Electrum, generate it on a trusted machine and select the 2FA option. This generates a special 2 out of 3 multisig wallet.
This will generate a seed, which can regenerate two of the three keys. This must be stored offline, either on paper or written to a disk preferably encrypted, but never stored on a computer connected to the internet. This seed cannot be viewed again unlike most Electrum seeds due to the holding of 2 of 3 keys so make sure it is written down.
The wallet will then save one of the 3 keys on your machine, and a third key is generated at the third party coin service TrustedCoin. This will set up a google authenticator 2FA key so install the 2FA google auth application on your phone. Maybe also store the same key on your tablet. Keep this key written down as well.
Whenever you try and send coins from your wallet, your PC after you enter your wallet passphrase will sign with the key stored in it. It will then send a request to trustedcoin asking them to sign, and a prompt will come up for your google authenticator key. Once you input this it will sign the transaction and broadcast it. They charge a small fee for their service but it is minute, lower than some miner fees at present.
It is important to keep a backup of your electrum wallet file, as when you restore your seed you will restore 2 of 3 keys and you will have to generate a new trustedcoin wallet to take advantage of the security it offers. This seed can also save you when you lose your 2FA key. Restoring the wallet file preserves the trustedcoin set up.
This is the most simple implemention of a MultiSig wallet and for ANYONE using an Electrum wallet this sort of wallet is needed AT MINIMUM if you are using it on your PC. You can also set up a multisig wallet with a hardware wallet on Electrum.
All multisig Bitcoin or Litecoin wallets start with a ‘3’ rather than a ‘1’.
There are other forms of multisig wallet, such as having multiple hardware wallets needed to sign, giving multiple people a key each for co-signers, Coinbase multisig vaults, among other things. Anyone using a desktop wallet for Bitcoins should set up a multisig wallet, such as the Electrum one mentioned above. Provided when the seed is shown your machine is secure and it is not saved on any online machine, the security of your coins is increased manyfold.