Multisig Cold Wallets: Security, Risks & Best Practices
What are Multisig Cold Wallets?
Multisignature (multisig) cold wallets are a top choice for securing digital assets, offering robust protection against theft. However, even these advanced security measures aren't foolproof, as the February 2025 Bybit hack demonstrated.
Cold Wallets Explained
A cold wallet stores cryptocurrency offline, disconnected from the internet. This significantly reduces the risk of remote attacks. Examples include:
- Hardware wallets (e.g., Ledger, Trezor)
- Paper wallets
- Air-gapped computers
Offline private keys minimize risks from phishing and malware.
Multisignature (Multisig) Explained
Multisig technology requires multiple private keys to authorize a transaction, unlike single-signature wallets. It's like a joint bank account needing multiple signatories.
Common setups include:
- 2-of-3 multisig: Two out of three keys required.
- 3-of-5 multisig: Three out of five keys required.
- 5-of-7 multisig: Five out of seven keys required.
This layered security prevents theft even if one key is compromised.
Who Uses Multisig Cold Wallets?
- Crypto exchanges (to prevent fraud)
- Institutional investors (to secure large crypto holdings)
- Decentralized autonomous organizations (DAOs) (for managing shared funds)
How Do Multisig Cold Wallets Work?
Multisig cold wallets use multiple private keys from trusted parties for transaction authorization, eliminating single points of failure.
- Key Distribution: Multiple private keys are generated and distributed among trusted parties or devices. A 3-of-5 setup might assign keys to the CEO, CFO, CLO, a secure offline backup, and the CSO for enhanced security and accountability.
- Transaction Request: A transaction proposal is created.
- Approval Process: Authorized signers approve the request (e.g., three out of five in a 3-of-5 setup).
- Transaction Broadcasting: Once enough approvals are received, the transaction is broadcast to the blockchain.
How Multisig Cold Wallets Can Be Hacked
Despite their strengths, multisig wallets are vulnerable. Attacks often exploit implementation flaws, human error, or third-party vulnerabilities.
1. Supply Chain Attacks (Bybit Hack, 2025)
The February 2025 Bybit hack, resulting in a $1.5 billion ETH loss, illustrates this. Hackers compromised a third-party wallet provider (SafeWallet), injecting malicious code that altered the multisig signing process. Bybit approved seemingly legitimate transactions that were secretly redirected.
2. Social Engineering Attacks
Hackers can manipulate users. In 2022, phishing emails and malware compromised a crypto fund's employee devices, leading to unauthorized access and transactions.
3. Rogue Insiders and Collusion
Malicious insiders can collude with hackers. A 2019 exchange incident saw an executive enabling a $200 million unauthorized withdrawal.
4. Smart Contract Vulnerabilities
Smart contract bugs can be exploited. A 2017 Parity Multisig Wallet bug froze over $150 million in ETH.
How to Make Multisig Cold Wallets More Secure
Enhance multisig cold wallet security by:
- Using a higher threshold (e.g., 4-of-7 instead of 2-of-3)
- Implementing multi-factor authentication (passwords, biometrics, HSMs)
- Using Shamir's Secret Sharing
- Employing air-gapped signing devices
- Geographically distributing keys
- Implementing a key rotation policy
- Conducting regular security audits
- Utilizing independent co-signers
- Implementing access logging and alerts
- Using multi-party computation (MPC) wallets
Are Multisig Cold Wallets Still Worth It?
Multisig cold wallets remain a strong security solution, but not foolproof. The Bybit hack highlights the importance of considering the entire security ecosystem, including physical and process security.
While they offer excellent protection, they are complex to manage and carry risks. The choice depends on your needs and technical capabilities. Codeum offers expert services to help you navigate these complexities and ensure your blockchain security. We provide smart contract audits, KYC verification, custom smart contract and DApp development, tokenomics and security consultation, and partnerships with launchpads and crypto agencies.
