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Implementing Multi-Signature Wallets: A Developer’s Guide

Karolina

09 Jun 2023
Implementing Multi-Signature Wallets: A Developer’s Guide

Blockchain technology, artificial intelligence (AI), and cryptocurrencies have transformed how digital transactions and value exchanges occur. It is crucial to ensure the security of digital assets as businesses and individuals adopt these technologies. One vital aspect of protecting digital assets is employing multi-signature wallets.

In this developer's guide, we will dive deep into multi-signature wallets, equipping you with the knowledge and insights needed for successful implementation. For blockchain developers, cryptocurrency exchange platforms, or companies handling high-value transactions, understanding multi-signature wallets is vital to improve security and reduce the risks associated with single-key wallets.

Table of Contents

This guide will discuss the definition and concept of multi-signature wallets, their advantages and use cases, and examine the key elements that contribute to their security and robustness. We will also offer a step-by-step breakdown of the implementation process, including wallet generation, transaction creation and signing, as well as wallet recovery and key management.

Additionally, we will tackle common challenges developers face when implementing multi-signature wallets and provide best practices for overcoming these obstacles. By the conclusion of this guide, you will possess a thorough understanding of multi-signature wallets and have the essential knowledge to incorporate them into your blockchain-based applications or systems.

Understanding Multi-Signature Wallets

Explanation and Principle

Within the realm of cryptocurrencies, a multi-signature wallet, commonly referred to as a multisig wallet, is a digital wallet variety that mandates multiple signatures for transaction authorization. In contrast to conventional single-key wallets that depend on one private key for approving transactions, multi-signature wallets allocate signing authority among several participants.

The core idea of multi-signature wallets focuses on enhancing security while minimizing the chances of unauthorized access or fraudulent transactions. By necessitating multiple signatures, these wallets add an extra layer of defense, making it harder for ill-intentioned actors to breach the wallet and pilfer digital assets.

Check out the list of 12 Multi-sig wallets

Benefits and Applications

  • Security Enhancement

Comparing with single-key wallets, multi-signature wallets notably improve security levels. Requiring multiple signatures makes it difficult for an intruder to seize the wallet's control and carry out unauthorized transactions. The wallet remains protected even if one key is compromised as more signatures are necessary.

  • Organizational Settings

Corporate settings greatly benefit from multi-signature wallets when multiple stakeholders' approvals are needed for financial procedures. Employing such a wallet enables organizations to guarantee that no lone individual exercises full control over the company's funds, thus diminishing the possibility of internal fraud.

  • Cryptocurrency Exchanges and High-Value Transactions

Handling considerable quantities of digital assets, cryptocurrency exchanges become appealing targets for cybercriminals. By adopting multi-signature wallets, these exchanges can implement rigorous security protocols, mandating multiple authorizations for withdrawals and reducing unauthorized asset transfer risks.

  • Escrow Functions

Multi-signature wallets frequently serve in escrow functions, where a neutral third party retains funds during a transaction until specified conditions have been met. The presence of multiple signatures assures that every party in the transaction provides consent before releasing the funds.

  • Jointly Managed Accounts

In scenarios where numerous individuals or entities jointly manage a digital asset wallet, such as business collaborations or familial accounts, multi-signature wallets guarantee collective transaction decision-making, mitigating the chances of unilateral actions and fostering trust among members.

By understanding multi-signature wallets' benefits and applications, one can lay the groundwork for utilizing their potential in fortifying digital asset security. In the following section, we will delve into multi-signature wallets' fundamental components, offering insights into their functioning and contribution to the overall security structure.

Essential Elements of Multi-Signature Wallets

Several vital elements make up a multi-signature wallet, working collectively to maintain its security and functionality. For developers who aim to effectively implement multi-signature wallet solutions, grasping these essential components is critical. Let's examine these elements more closely:

Public and Private Keys

  • Public Keys

Generated from their corresponding private keys, public keys are cryptographic addresses that function as unique identifiers for receiving funds in a multi-signature wallet. These public keys can be shared freely and utilized by anyone to confirm the legitimacy of transactions linked with the wallet.

  • Private Keys

Private keys are confidential, randomly created cryptographic codes that allow access to the funds held within a multi-signature wallet. Each participant in such a wallet owns a private key which must be securely stored and not shared with unauthorized parties to prevent unwarranted access to the wallet.

Signature Threshold

  • Signature Requirement

The signature threshold refers to the minimum number of signatures needed to approve a transaction from a multi-signature wallet. This determines the security level and control over the wallet. A 2-of-3 signature threshold, for instance, would necessitate two out of three authorized participants' approval for a transaction.

  • Flexibility and Security

Selecting an appropriate signature threshold depends on finding the right balance between flexibility and security. A higher threshold ensures increased security through requiring more signatures but might create difficulties regarding transaction speed and convenience. In contrast, a lower threshold offers more flexibility but could jeopardize security.

Address Types

  • Pay-to-Script-Hash (P2SH)

P2SH is a commonly used address type for multi-signature wallets, enabling the creation of a redeem script that defines the conditions necessary for spending funds. The redeem script comprises authorized participants' public keys and the signature threshold.

  • Pay-to-Witness-Script-Hash (P2WSH)

Introduced alongside the Segregated Witness (SegWit) upgrade, P2WSH is an address type that offers enhanced security and decreased transaction size. P2WSH addresses place the redeem script within the transaction's witness section, improving the scalability and efficiency of multi-signature transactions.

Comprehending the roles and functionalities of these crucial components is fundamental for successfully implementing multi-signature wallets. In the subsequent section, we will explore the implementation process of multi-signature wallets in-depth, equipping developers with a comprehensive guide to effectively generate, transact, and manage these wallets.

Implementing Multi-Signature Wallets

For the successful implementation of multi-signature wallets, it is crucial to follow secure principles and pay close attention to detail. In this part, we present a comprehensive guide to aid developers in incorporating multi-signature wallets seamlessly into their applications or systems.

Generating Wallets

  • Establish Signature Threshold

Select the optimal signature threshold based on your multi-signature wallet's security needs and flexibility.

  • Produce Public/Private Key Pairs

Using cryptographic libraries or tools, produce a unique public/private key pair for every individual involved in the multi-signature wallet. Guarantee that the keys are safely generated and stored, adhering to key management best practices.

  • Construct Multi-Signature Address

Employ suitable libraries or tools to construct a multi-signature address, like a P2SH or P2WSH address. Define the necessary number of signatures and input the authorized participants' public keys.

Creating and Signing Transactions

  • Identify Transaction Inputs and Outputs

Determine the transaction inputs (funds being used) and outputs (target addresses) for the intended transaction from the multi-signature wallet.

  • Assemble Transaction

Construct the transaction using the transaction details and the multi-signature address as input. Make sure that the transaction complies with your chosen blockchain platform's rules and protocols.

  • Authorize Transaction

All authorized members must employ their private keys to authorize the transaction. Merge the signatures as needed by the signature threshold.

Recovery of Wallets and Key Management

  • Backup and Safekeeping of Keys

Securely backup and keep all private keys related to the multi-signature wallet. Utilize secure storage solutions like hardware wallets, encrypted digital storage, or offline backups.

  • Rotation of Keys

To improve security, think about employing key rotation strategies periodically. Generate new key pairs and modify the multi-signature wallet setup accordingly. Manage the shift to new keys carefully to prevent any interference with wallet operations.

  • Establishing Recovery Procedures

Develop a recovery plan for situations where keys are lost or compromised. Lay out the actions and protocols for retrieving funds from the multi-signature wallet, which includes verifying participants' identities and initiating the necessary key replacement or regeneration.

Adhering to these implementation guidelines enables developers to effectively integrate multi-signature wallets into their blockchain-based applications or systems. It is essential to recognize that challenges might present themselves during implementation. In the following section, we will explore common obstacles and offer best practices for developers working with multi-signature wallets.

Common Challenges and Best Practices

Implementing multi-signature wallets can present certain challenges for developers. In this section, we will explore some common challenges and provide best practices to overcome them effectively.

Common Challenges

  • Compatibility with Existing Wallets and Services

Integrating multi-signature wallets with existing wallets or services may pose compatibility challenges. Ensure compatibility by verifying the supported address types and transaction formats of the wallets and services involved.

  • Key Management

Managing and securely storing private keys can be complex, especially when multiple participants are involved. Implement robust key management practices, such as encryption, hardware wallets, or distributed key management systems, to safeguard the private keys.

  • User Experience

Multi-signature transactions require additional steps and coordination between participants, which can impact user experience. Streamline the user interface and provide clear instructions to ensure a smooth and intuitive experience for users interacting with the multi-signature wallet.

Best Practices

  • Security Measures

Implement rigorous security measures throughout the entire development and deployment process. This includes secure key generation, encryption, secure storage of keys, secure communication channels, and comprehensive testing for vulnerabilities.

  • Code Reviews and Audits

Conduct regular code reviews and security audits to identify and address potential vulnerabilities and weaknesses in the implementation of the multi-signature wallet. Engage external security experts to perform thorough audits for an unbiased evaluation.

  • Thorough Testing

Perform extensive testing of the multi-signature wallet implementation, including unit tests, integration tests, and end-to-end tests. Test various scenarios and edge cases to ensure the reliability and robustness of the wallet.

Documentation and Education:

Provide clear and comprehensive documentation for developers and users on how to interact with the multi-signature wallet. Educate users about the benefits and security features of multi-signature wallets to build trust and encourage adoption.

  • Regulatory Compliance

Consider regulatory requirements and compliance standards applicable to your jurisdiction when implementing multi-signature wallets. Ensure adherence to relevant regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.

By adhering to these best practices, developers can mitigate risks, enhance security, and improve the overall functionality and user experience of multi-signature wallets.

Read also our guide - Building Decentralized Oracles

Conclusion

Multi-signature wallets boost security and management of digital assets by necessitating multiple authorizing signatures for transactions. In this guide, we delved into the meaning, merits, and essential aspects of multi-signature wallets. A comprehensive implementation tutorial was presented for developers, encompassing wallet creation, transaction generation and signing, along with wallet restoration and key administration.

Implementation of multi-signature wallets can pose challenges; however, adhering to best practices such as stringent security protocols, code examinations, exhaustive testing, and ample documentation can aid in surmounting these hurdles. By employing multi-signature wallets, both businesses and individuals can safeguard their digital holdings, especially in corporate settings, exchanges, high-value deals, escrow provisions, and shared accounts.

As blockchain technology advances and influences diverse sectors, prioritizing digital asset safety and integrity is imperative. Adopting multi-signature wallets plays a pivotal role in accomplishing this aim. By grasping the notions and best practices detailed in this guide, developers are well-equipped to incorporate multi-signature wallets into their software applications, fortifying security and guaranteeing the reliability of transactions in the virtual space.

Do you need help with Implementing Multi-Signature Wallets? Or maybe you look for exceptional Web3 & Blockchain developers for your project? Contact us!

Tagi

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Token Engineering Process

Kajetan Olas

13 Apr 2024
Token Engineering Process

Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.

In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.

Table of Contents

Discovery Phase of Token Engineering Process

The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.

Defining the Problem

This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that. 

The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE.
MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.

In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes.
A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.

Identifying Stakeholders and Value Flows in Token Engineering

This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.

Incentive Mechanisms Canvas

The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.

source: https://www.canva.com/design/DAFDTNKsIJs/8Ky9EoJJI7p98qKLIu2XNw/view#7

Design Phase of Token Engineering Process

The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase. 

Token Engineering Artonomous Design Diagram
Artonomous design diagram, source: Artonomous GitHub

Objective Function

Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function.
Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.

Deployment Phase of Token Engineering Process

The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.

Agent-based Modelling 

In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.

Monte Carlo Simulations

Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.

Testnet Deployment

If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.

Time Duration

Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.

Required Skills for Token Engineering

Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:

  • Systems Engineering
  • Machine Learning
  • Market Research
  • Capital Markets
  • Current trends in Web3
  • Blockchain Engineering
  • Statistics

Summary

The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to contact@nextrope.com. Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.

FAQ

What does token engineering process look like?

  • Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.

Is token engineering meant only for big projects?

  • We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.

How long does the token engineering process take?

  • It depends on the project and may range from 2 weeks to 5 months.

Tagi

What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained

Karolina

18 Mar 2024
What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained

Enter Berachain: a high-performance, EVM-compatible blockchain that is set to redefine the landscape of decentralized applications (dApps) and blockchain services. Built on the innovative Proof-of-Liquidity consensus and leveraging the robust Polaris framework alongside the CometBFT consensus engine, Berachain is poised to offer an unprecedented blend of efficiency, security, and user-centric benefits. Let's dive into what makes it a groundbreaking development in the blockchain ecosystem.

Table of Contents

What is Berachain?

Overview

Berachain is an EVM-compatible Layer 1 (L1) blockchain that stands out through its adoption of the Proof-of-Liquidity (PoL) consensus mechanism. Designed to address the critical challenges faced by decentralized networks. It introduces a cutting-edge approach to blockchain governance and operations.

Key Features

  • High-performance Capabilities. Berachain is engineered for speed and scalability, catering to the growing demand for efficient blockchain solutions.
  • EVM Compatibility. It supports all Ethereum tooling, operations, and smart contract languages, making it a seamless transition for developers and projects from the Ethereum ecosystem.
  • Proof-of-Liquidity.This novel consensus mechanism focuses on building liquidity, decentralizing stake, and aligning the interests of validators and protocol developers.

MUST READ: Docs

EVM-Compatible vs EVM-Equivalent

EVM-Compatible

EVM compatibility means a blockchain can interact with Ethereum's ecosystem to some extent. It can interact supporting its smart contracts and tools but not replicating the entire EVM environment.

EVM-Equivalent

An EVM-equivalent blockchain, on the other hand, aims to fully replicate Ethereum's environment. It ensures complete compatibility and a smooth transition for developers and users alike.

Berachain's Position

Berachain can be considered an "EVM-equivalent-plus" blockchain. It supports all Ethereum operations, tooling, and additional functionalities that optimize for its unique Proof-of-Liquidity and abstracted use cases.

Berachain Modular First Approach

At the heart of Berachain's development philosophy is the Polaris EVM framework. It's a testament to the blockchain's commitment to modularity and flexibility. This approach allows for the easy separation of the EVM runtime layer, ensuring that Berachain can adapt and evolve without compromising on performance or security.

Proof Of Liquidity Overview

High-Level Model Objectives

  • Systemically Build Liquidity. By enhancing trading efficiency, price stability, and network growth, Berachain aims to foster a thriving ecosystem of decentralized applications.
  • Solve Stake Centralization. The PoL consensus works to distribute stake more evenly across the network, preventing monopolization and ensuring a decentralized, secure blockchain.
  • Align Protocols and Validators. Berachain encourages a symbiotic relationship between validators and the broader protocol ecosystem.

Proof-of-Liquidity vs Proof-of-Stake

Unlike traditional Proof of Stake (PoS), which often leads to stake centralization and reduced liquidity, Proof of Liquidity (PoL) introduces mechanisms to incentivize liquidity provision and ensure a fairer, more decentralized network. Berachain separates the governance token (BGT) from the chain's gas token (BERA) and incentives liquidity through BEX pools. Berachain's PoL aims to overcome the limitations of PoS, fostering a more secure and user-centric blockchain.

Berachain EVM and Modular Approach

Polaris EVM

Polaris EVM is the cornerstone of Berachain's EVM compatibility, offering developers an enhanced environment for smart contract execution that includes stateful precompiles and custom modules. This framework ensures that Berachain not only meets but exceeds the capabilities of the traditional Ethereum Virtual Machine.

CometBFT

The CometBFT consensus engine underpins Berachain's network, providing a secure and efficient mechanism for transaction verification and block production. By leveraging the principles of Byzantine fault tolerance (BFT), CometBFT ensures the integrity and resilience of the Berachain blockchain.

Conclusion

Berachain represents a significant leap forward in blockchain technology, combining the best of Ethereum's ecosystem with innovative consensus mechanisms and a modular development approach. As the blockchain landscape continues to evolve, Berachain stands out as a promising platform for developers, users, and validators alike, offering a scalable, efficient, and inclusive environment for decentralized applications and services.

Resources

For those interested in exploring further, a wealth of resources is available, including the Berachain documentation, GitHub repository, and community forums. It offers a compelling vision for the future of blockchain technology, marked by efficiency, security, and community-driven innovation.

FAQ

How is Berachain different?

  • It integrates Proof-of-Liquidity to address stake centralization and enhance liquidity, setting it apart from other blockchains.

Is Berachain EVM-compatible?

  • Yes, it supports Ethereum's tooling and smart contract languages, facilitating easy migration of dApps.

Can it handle high transaction volumes?

  • Yes, thanks to the Polaris framework and CometBFT consensus engine, it's built for scalability and high throughput.

Tagi