Understanding How Multi-Signature Wallets Work

I’m new to this multisig stuff. Watched a bunch of videos on setting it up with Electrum and hardware wallets. I get the basic steps, but I’m confused about something important. If I set up a "2 of 4" multisig, where two out of four need to sign a transaction, where does that rule even live? Is it on the blockchain?

Good question! The exchange or the receiver doesn’t need to know about the second signer until the transaction is actually broadcast. Only then does the second signer add their signature.

So, what’s a multisig wallet anyway? It’s basically a wallet that requires multiple signatures to authorize a transaction. When you set it up, you decide how many co-signers are needed. That’s the threshold for broadcasting to the Bitcoin network.

I’m still not clear. In my "2 of 4" case, if I sign a transaction today and then a day later my friend adds their signature, how does my wallet know I already signed? Can it broadcast immediately?

When you sign, your wallet creates a partially signed bitcoin transaction (PSBT). You send that PSBT to the second signer, and then they sign it and broadcast it. That's how multisig works.

Okay, got it. But how do I actually send my PSBT to the other signer? And do I have to keep using Electrum for multisig transactions or can I use exchanges like Coinbase?

You can send it via QR code, file, or just copy and paste it. But you can’t use an exchange. You’ll need a non-custodial wallet that supports multisig. Electrum and Sparrow are good options.

Thanks for the help, everyone!

Just to simplify a bit, when you send to a multisig address, the sender sees just one address. But that address comes from hashing together multiple public keys and the multisig rules.

+1 for that explanation!

It’s like a joint account at a bank. You might have ten people involved, but only two or three signatures are needed for a valid transaction. Just be careful when using these wallets.

Exactly! Multisig can be great for security, but if you don’t know what you’re doing, you can easily lock yourself out. Remember, you don’t control the keys on an exchange.

You don’t need to use multisig with Electrum if you don’t want to. But if you do, everyone signing needs to be involved at the start.

Right! You can’t complete a transaction without the other signers. Their keys are what validate your transaction, not the exchange. Just you, your wallet, and the blockchain.

Thanks again! So if I sign a transaction in a two-out-of-four setup, I just send the PSBT file to the others, and they can sign it from their wallets? That’s what I was missing.

Your wallet holds the rules for spending from the multisig address. When you spend, the script reveals the conditions, and it all has to match.

It’s not stored on the blockchain, but in the address script. That script sets the required signers and includes their public keys. If you’re into coding, check out some resources on scripting.

Not quite. For a 2-of-4 setup, you need all four extended public keys to generate the wallet addresses. You can’t lose any of them! Only two are needed to sign, but all four are key for setting it up.

Exactly, that’s an important point! All signers need access to the extended public keys to set up the multisig wallet properly.