MultiSig Wallets Could be a Great Match for DAO’s Security

    TheMorningCrypto Desk
    TheMorningCrypto Desk
    Published on November 2, 2022 2:11 PM

    Updated on January 26, 2023 10:10 AM

    To implement off-chain decisions on the Ethereum blockchain, DAO combines free, off-chain voting for the community with a multi-sig wallet controlled by the "DAO Committee."
    MultiSig Wallets Could be a Great Match for DAO’s Security

    In the conventional world, investors typically provide capital as cash contributions in exchange for firm shares. There are many more alternatives for how that capital is represented with DAOs. It could be a standard token like ETH, a token unique to the DAO, or a combination of other cryptocurrencies.

    Any investment of resources into the DAO is kept using a wallet address known as the Treasury. You can understand the significance of having effective governance for access to it if the entire Treasury is linked to a single wallet address.

    First of all, let's see what a MultiSig Wallet is.

    What is a MultiSig Wallet?

    A multi-signature wallet requires multiple signatures to validate a transaction. A private key address is used in this context for the signature.

    We typically use a single key address under the owner's control whenever we conduct a transaction in a bitcoin wallet. In contrast to this technique, a multi-sig wallet makes it easier to input several key addresses when approving transactions.

    To Know More About MultiSig Wallet, Checkout this: MultiSig Wallet

    Purpose of MultiSig Wallet

    The primary concern while investing in cryptocurrencies is security and safety. A multi-sig wallet guarantees security, and investors may diversify their holdings without consideration.

    The multi-sig wallet capability will soon be available to users of all digital asset management platforms. Therefore, adopting a multi-sig wallet can significantly reduce cryptocurrency theft, device loss, malware assaults, and phishing attempts.

    How MultiSig Wallet can Help DAO?

    The recent organizational form is gaining traction, and the DAO may benefit significantly from the multi-sig wallet invention. Decentralization is a critical component of DAO's governance architecture, Treasury, and execution.

    The organization's funding choice in the treasury section is made through multi-sig wallet transactions.

    One example of what not to do is to give the private keys to one individual, who can then use them to access the wallet. Several things could go wrong, including:

    • The person could flee with the entire Treasury, dragging the DAO by the rug.
    • If the secret keys aren't shared with anybody else, even if the single individual is reliable, the Treasury will be locked if something awful happens to them.
    • There is only one point of accountability for such issues if only one person is connected to the DAO.

    The solution is to provide multiple people access to the wallet so that numerous people must approve transactions. And, MultiSig Wallets are the exact solution.

    For example, Gnosis Safe is an Ethereum-based smart contract wallet that needs a certain number of users' consent before a transaction occurs. You can choose how many individuals must consent for a transaction to move forward and how many are necessary. You can configure the wallet to request consent from each of the three primary stakeholders in your organization, for instance, before a transaction is sent. This prevents the abovementioned issues and ensures that no single person might risk the assets.

    Note: Many intelligent contracts like Ethereum don't support MultiSig Wallet directly. One either has to code or use an API for the purpose.

    Risk Factor in DAO: Coordinate Signers

    Setting up the wallet is simple; the difficult part is figuring out how to best coordinate signers without returning to a system where the division of the system is uneven, and some specific group handles the majority of decisions.

    There is a higher chance of coordination being difficult when there are more participants. More signatures are required, and everyone can view everything. Some DAOs will choose convenience over security and accept the associated risks. Some people won't give in and will gladly go to extreme lengths to get their money. To function more quickly and with greater flexibility, DAOs use "pod" or subDAO architecture, which generates several multi-signature wallets for smaller teams.