Understanding the Multisig Xpub: A Guide for Secure Wallet Management

Since the dawn of cryptocurrencies and their ensuing popularity and demand that saw their value soar, they have become a constant target for malicious actors. While attempts to steal them range from primitive techniques, such as the $5 wrench attacks, to sophisticated online attack vectors, the crux of digital asset security mainly lies with the safety of secret recovery phrases (SRPs).

Before 2013, single-key wallets were used as the master key to one’s digital fortune. Lose that key, and your digital assets are locked away forever. Let it slip into the wrong hands, and your Bitcoin is gone in an instant. Multisig wallets mitigate this risk by demanding multiple approvals, ensuring your digital assets remain secure even if one key is compromised.

The vulnerability of a single-key wallet, posed by the flaw of a single point of failure, underscores the significance of a multisig wallet. Whether you’re just a simple HODLer with significant holdings or part of an institution managing funds, understanding multisig wallets can mean the difference between security and catastrophe.

This article delves into multisig wallets, the role of public keys, the capabilities of extended public keys, and derivation paths. 

Let’s dive in.

What Are Multisig Wallets?

Single-key crypto wallets are akin to a medieval castle with one gate. Breach that gate—steal the seed phrase, hack the device, or lure the owner with phishing techniques—and the castle falls. This is because relying on a single signature to authorize a transaction, while it presents ease of use, could mean a total loss of funds from a single compromise.

Multisig wallets alter this equation. While the multiple-signature concept has existed in real-world applications for decades, it debuted in cryptocurrency in 2012 with Bitcoin’s Pay-to-Script Hash (P2SH). 

These are smart contract-based wallets requiring a predefined number of digital signatures to validate and execute transactions. As such, they combine multiple sets of SRPs into a single wallet for enhanced security. This is achieved by utilizing a lesser-known cryptographic tool called an extended public key (xpub) from each master private key or seed phrase to create multiple signature addresses.

Think of it as requiring multiple executives to sign off on a major business decision rather than giving a single person unilateral authority. This isn’t just about adding more locks to the same door. Instead, it entails creating an entirely novel governance structure where multiple SRPs combine to form a unified wallet. Each SRP remains separate, typically stored on different hardware wallets or in various physical locations. Yet, they work together to manage the same pool of coins.

For this reason, such wallets are particularly ideal for individuals with substantial digital asset holdings or higher security needs, as well as institutions that require robust digital asset security. Recent incidents, such as crypto exchange hacks, lost seed phrases, and social engineering attacks, that have cost institutions billions highlight the importance of these wallets.

Understanding Public Keys

Before delving deeper into xPubs, let’s clarify public keys—one of the fundamental building blocks of cryptocurrency wallets. In asymmetric cryptography, every wallet has a key pair—a private key (your secret password) and a public key (a shareable identifier). The public key derives addresses where others send you coins, while the private key signs transactions to spend them.

Public keys are “less sensitive” because they can’t spend funds—they only receive and verify. Thus, sharing them publicly doesn’t risk your digital assets, unlike private keys that must be kept secret at all costs.

Public keys can be generated using a master public key or an xPub, which can generate multiple unique addresses from a single source. This means users can create a series of new addresses for receiving Bitcoin without exposing their private keys—an essential security feature that prevents address reuse while maintaining privacy.

Think of it this way: your public key is like your home address. Anyone can use it to send you mail (or Bitcoin), and knowing your address doesn’t give them the ability to open your front door or spend your money. The private key, by contrast, is the actual key to your house—something you’d never share with anyone.

What Are Extended Public Keys?

Extended public keys (xPubs) form the basis for Hierarchical deterministic (HD) wallets. From a single seed phrase, HD wallets can generate virtually infinite private-public key pairs following a deterministic mathematical process. The “extended” part in xPub implies that the key includes additional information beyond the basic public key, specifically a chain code that allows generating child keys.

Simply, the xPub, also known as the parent public key, allows anyone to generate every public key and address that your wallet will ever create. However, it cannot generate private keys, sign transactions, or spend your Bitcoin. 

This asymmetry, for instance, can allow you to share your xPub with your accountant to audit your holdings, import it into watch-only wallets to monitor balances, or even combine it with other xPubs to create multisig addresses. In short, the xPub reveals the “where” of your digital assets without exposing the “how to spend” information locked in your private keys.

For UTXO-based cryptocurrencies, such as Bitcoin, Litecoin, Dogecoin, Cardano, Bitcoin Cash, and Zcash, xPubs offer a standardized method for creating addresses while maintaining privacy and security. Each new address can receive funds independently, but all derive from the same master key, simplifying backup and recovery.

Multisig Derivation Paths and xPub

XPubs don’t work in isolation. Instead, they rely on derivation paths, which serve as instructions that tell HD wallets how to derive a specific account extended private key (xPriv) and xPub from the master private key or SRP. 

While derivation paths look complex (e.g., m/12’/0’/0’/2’), they are simple instructions following a standardized format. They function like a recipe, ensuring that different devices and wallet applications can generate the same keys from the same seed phrase. This means that, given the same seed phrase and derivation path, any compliant wallet will yield the same results.

These instructions determine how SRPs generate xPrivs and xPubs used in multisig wallets, ensuring that each wallet has a unique set of keys. Its mathematical precision means that you can lose your wallet software and still recover everything, as long as you have your SRP and know the derivation path.

In the same vein, hardware wallets generate xPubs based on their own derivation paths. These xPubs are then combined by wallet software to create multisig addresses, eliminating the need to know each device’s full derivation path. This creates a sophisticated separation of concerns, allowing for a multisig wallet setup where, for instance, three distinct hardware wallets (each using different derivation paths) can each contribute their xPubs to a single multisig configuration.

The coordinator wallet software handles the complexity behind the scenes, generating addresses that require signatures from multiple devices to spend. Ideally, users can import xPubs and derivation paths via a text file or QR code, making it easy to set up a new multisig wallet while maintaining the security isolation between different signing devices.

In general, this architecture means that even if your coordinator software fails, or you need to switch to a different wallet app, you can reconstruct your multisig setup as long as you have the xPubs and know the derivation paths used by each device.

How Do You Set Up a Multisig Wallet?

Creating a multisig wallet revolves around collecting and combining xPubs. Despite the intricacy of the underlying cryptography, modern wallets have significantly simplified the practical steps. This includes:

1. Deciding the number of signatures required to authorize transactions

The initial step involves determining how many signatures out of the group are required to authorize a transaction. It is often expressed as an M-of-N setup, where M represents the minimum number of required signatures to execute a transaction and N is the total number of signers.

Put another way, multisig setups are configured to require 2-of-3, 3-of-5, or any other M-of-N combination of signatures. For example, in a 2-of-3 multisig wallet:

• Three separate seed phrases are generated on three different hardware wallets.
• The wallet is constructed such that any two of the three associated private keys are required to sign and broadcast a transaction.

Technically speaking, signatures can originate from devices controlled by different individuals or by a single individual managing multiple devices or keys.

2. Establishing multisig signing devices

A best practice for ensuring crypto key security emphasizes never putting all your eggs in one basket. Thus, you require multiple signing devices spread across different types of wallets, especially hardware wallets. 

Each device gets initialized with its own unique SRP, which must be backed up separately and securely. Moreover, these seed phrases should never coexist in the same physical location or digital environment.

3. Adding all signer wallets

Next, collect the public addresses of all the wallets that will be co-signers. For each co-signer, export their public key or other necessary information. Users can then import xPubs via QR code or MicroSD card using a text file or wallet software. Additionally, they can define the wallet parameters, such as the derivation path and address format. 

Hardware wallets make this easy by encoding the xPub as a QR code that you can scan with your multisig wallet. The key factor is that the import contains no private information (the xPub alone cannot compromise your funds).

Once you have all the xPubs, the coordinator wallet software combines them according to your chosen multisig configuration. In a 2-of-3 setup, you’d import three xPubs and specify that two signatures are required for transactions. The software generates multisig addresses using all three xPubs, creating addresses that require cooperation from at least two of the three corresponding private keys.

4. Verifying the xPubs and derivation paths

The final step in setting up a multisig wallet is to verify the xpubs and derivation paths, ensuring that each wallet has a unique set of keys. This involves creating a receive address on the multisig wallet, then verifying that each hardware wallet displays the same address. This confirms that your multisig setup is accurate and all devices are working from the same configuration.

After verification, users can use their respective wallets to generate new addresses and manage their multisig wallet, providing a secure and flexible way to manage their digital asset holdings. The wallet can create virtually infinite receiving addresses, each requiring the same multi-signature authorization to spend.

Conclusion

The multisignature concept arguably represents the pinnacle of crypto wallet security, providing a secure way to manage your Bitcoin holdings. By requiring two or more signatures to authorize transactions, multisig addresses mitigate single points of failure and reduce the risk of losing access to funds.

As adoption grows, embracing this technology means the difference between a single point of failure and a robust, resilient system that safeguards your Bitcoin even when individual components fail or are compromised. 

Therefore, for anyone holding significant cryptocurrency—whether an individual investor, a business treasury, or an institutional custodian—understanding multisig wallets and xPubs is no longer optional. And while at it, follow best practices—verify everything, store seed phrases and private keys offline, use hardware wallets, and stay informed. 

Introducing Ledger Multisig

Ledger Multisig is a purpose-built premium security and governance layer designed to help you move billions with certainty. It combines the best of both worlds: the flexibility of a software platform with the security of Ledger’s industry-leading ecosystem. It delivers unmatched clarity, control and connectivity for leaders who can’t afford mistakes.

Transaction Check and Clear Signing smart contracts ensure optimal transparency for informed decision-making. Multi-party policies and role-based governance give users genuine ownership and comprehensive oversight. Users can access thousands of coins and tokens, across several blockchains, from a single, intuitive dashboard. This unique approach helps safeguard your digital assets from sophisticated attacks and provides a truly secure path for managing your digital treasury.

Want to use Ledger for your Multisig operations? Learn More at multisig.ledger.com