Issue #51: Multisigs - The DAO Bank Account
This week’s topic is the multi-signature wallet (aka “multisig”) - a technology that has been around since the early days of Bitcoin but has been reappropriated by Web3 in recent years and become a core operational building block of DAOs.
This is not a topic that gets covered a lot, but the evolution of the multisig is fascinating and the role it plays, and will play, in Web 3 cannot be overstated.
One stat you need to know going in…over $115B …with a “B”…of ERC-20 tokens are held in Gnosis Safes, the most popular Ethereum multi-sig wallet.
Let’s zoom in…
First Generation Multisigs
Your average cryptocurrency wallets consist of one public and one private key, the latter of which is used to sign and authorize transactions on the blockchain. Multisignature wallets, as the name suggests, have multiple private keys and require multiple signatures to execute a transaction.
For example, a multisignature wallet may be set up to need 3 of 5 signatures. Five unique keys are distributed to five different individuals, and at least three of them must sign with their private key before a transaction can be initiated from the wallet.
This idea of using multiple passwords to protect something valuable actually dates back thousands of years. Monks at the monastery on Mount Athos, for example, used secure crypts to store their most precious relics. Individual monks were given only partial keys to the crypt to ensure a rogue monk couldn’t steal the relics.
For a tangible modern day example, consider the United States's two-man rule for nuclear weapons - two people must each use their unique key to unlock the launch.
The first Bitcoin multisig technology was introduced in 2012, and like the above examples, the narrative centered around security. Early cryptocurrency exchanges struggled to securely custody user funds in single-signature wallets. When multisigs were introduced, they quickly became best practice for exchanges because they eliminated a single point of failure (if implemented correctly).
This remained the narrative around multisigs until 2017…
Second Generation Multisigs - “the DAO Bank Account”
Today, DAOs are the most ardent adopters of multisigs. For DAOs, multisigs helped answer the question… “How does a decentralized community manage capital?”
All sorts of DAOs -- from temporary, discrete-mission DAOs like ConstitutionDAO to mature DeFi protocols like MakerDAO -- make use of the multisig as a core part of their operations, using it to receive tokens from donors, pay contributors, and securely custody assets.
Three main features of multisigs enable this coordination: an added layer of trust, permissionlessness, and transparency.
Added trust layer. Multisigs greatly improve trust by allowing people to approve individual withdrawals and transactions before they take place. With a traditional joint bank account, a business-partner gone bad can withdraw your funds and disappear. Of course, multisigs are not a “trust panacea.” It’s still crucial to trust the other signers on the multisig; if their accounts are compromised or they go rogue, your funds would still be at risk.
Permissionlessness. Like all crypto wallets, multisigs are permissionless. They don't require any permission or approval to setup. Practically, this means any group/community/DAO can maintain a shared bank account.
Transparency. Modern multisig wallets are actually smart contracts on chain. All transactions in and out of the wallet are therefore public. This is an important feature for community oversight.
The most popular multisignature wallet today is the Gnosis Safe. As of today, over $115 billion in ERC-20 tokens alone are stored in over 42,000 Gnosis Safes. And keep in mind, these numbers don’t include Ethereum (not an ERC20) and only include Gnosis multisigs. While the majority of multisigs are Gnosis Safes, there are others.
Multisigs are a critical part of DAO infrastructure, and as the number of DAOs increases, so does the need for multisigs. Take a look at the total number of Safes created and Safe transactions made in the last few years:
If you'd like to see more stats on Gnosis Safes, check out this fantastic Dune dashboard by Tobias Schubotz.
Though adoption is skyrocketing, the multisig user experience leaves a lot to be desired. While a normal Ethereum wallets can perform any type of transaction, multisigs aren't as widely integrated into decentralized apps. Most multisigs today are used for simpler operations like sending and receiving tokens. It's still difficult to make simple trades!
Because they aren't properly integrated with many dApps, it can be hard to tell what certain initiated transactions are attempting. For instance, trying to make a trade on Uniswap through a multisig results in a jumble of metadata; instead, it's easier to transfer a small amount of the multisig's funds to an externally owned account, make the trade, then transfer the new token back to the multisig. Not ideal.
The Future of Multisigs - A Few Predictions
Though multisigs aren't perfect, their benefits outweigh their flaws. In time, these flaws will be fixed, adoption will continue to increase, and we'll see all sorts of coordination move to multisigs.
I think we can look at the future of the multisig in two ways:
Improvements in the multisig itself (more functionality & integration, inter-chain)
Process improvements to the DAO workflow
Improvements to the Multisig
Most importantly, I think we'll continue to see dApp-multisig integrations increase very, very quickly. These integrations will unlock more coordination since more activity can take place directly in the multisig (rather than transferring to a normal wallet and then back to the multisig).
These integrations will allow for increasingly complex activities to take place through multisigs. No longer will multisigs be moving ERC-20 tokens or performing simple transactions, but they'll directly become important actors in things like governance. Until recently, a Gnosis Safe was unable to vote or create a proposal on Snapshot, the most popular governance tool in crypto.
Following this upgrade, DAOs will now be able to take metagovernance to the next level. By owning tokens of partner protocols and DAOs, communities will be able to exercise influence over those protocols in a way that was previously out of reach.
Next, because of cost, multisigs will be omni-chain. We're already seeing this happen to a degree, with Gnosis Safe going live on Polygon and Arbitrum last year. Deploying a Gnosis Safe with 4 owners on Ethereum mainnet can cost ~330,000 gas. With today's gas prices (100-150 gwei) on the gas price, such a transaction could cost more than $100 (depending on the price of ETH). While still cheap relative to the coordination it confers, it can be out of reach for those just starting out. Further, there are gas costs required to sign (approve) transactions. Deploying to Polygon, Arbitrum, and other EVM-compatible chains means that the multisig will become cheaper and quicker to use.
We're in the first or second inning of multisig adoption. While they're used widely by the crypto-native community, 95% (or maybe higher) of the world hasn't even heard the term multisig. As is the case with the rest of crypto, I think we'll see multisigs abstract away the difficult nuances that make them hard to use (gas cost estimating, integrations, poor mobile experience).
As I noted above, DAOs are the main adopters of multisigs today. At the moment, it's common for a DAO to use one or two main multisigs in their operations. Typically, one of the multisigs is used for frequent spending (like a checking account) while the other, larger multisig contains more tokens and acts as the DAO's war chest (treasury).
As DAOs figure out how to organize themselves, we've seen the dominant narrative shift from a monolithic, "single DAO" structure to a "sub-DAO" model. In the sub-DAO model, different working groups within the DAO act as their own mini-DAO.
For instance, a marketing sub-DAO might control its own multisig underneath a larger DAO, with the autonomy to direct funds to marketing initiatives. The marketing sub-DAO might receive a budget from the main DAO treasury and decide to hire a graphic designer to create illustrations for one of their blog posts. Operating in this manner is actually much more efficient as it reduces bureaucracy - rather than having every payment approved by the core treasury, only periodic budgets need to be approved.
I think we'll see DAOs continue to embrace this multi, multisig structure, delegating lower level decisions to sub-DAOs. If this is the case, we may see additional permissions encoded into multisigs. For example, perhaps when the sub-DAO's multisig wants to spend over 1 ETH on a single transaction, the main multisig must also sign. Or perhaps the sub-DAO multisig can only send tokens to certain addresses.
Multisigs are one of the most powerful primitives in crypto today, enabling coordination among strangers and business partners alike. Though we're seeing multisig adoption increase alongside the explosion of DAOs, in the next 10 years we'll see the multisig replace the joint bank account as the primary means of sharing assets and coordinating with others.
Thanks for reading,
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