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Multisig Setup Guide

What You'll Do

In this guide, you will:

  • Set up 3 hardware wallets for multisig
  • Create a 2-of-3 multisig wallet in Sparrow
  • Properly back up seed phrases and wallet descriptor
  • Test your recovery procedure

⏱️ Time required: 2-3 hours
📊 Difficulty: Intermediate to Advanced
💰 Estimated cost: $200-450 (3 hardware wallets) + $30-60 (metal seed backups)
🔧 Prerequisites: 3 hardware wallets, Sparrow Wallet installed, understanding of multisig concepts

Background Reading

If you're new to multisig, read Multisig Wallets Explained first to understand what you're building and why.

This guide walks you through setting up a 2-of-3 multisig wallet—the most popular configuration for individual self-custody. You'll need any 2 of your 3 keys to spend, providing both theft protection and loss protection.

What You're Building​

If This HappensResult
One device stolenFunds safe (thief needs 2 devices)
One seed phrase lostFunds safe (2 remaining devices work)
House fire destroys one locationFunds safe (other locations have keys)

Quick Recap: Multisig Essentials​

Before starting, make sure you understand these critical points:

ConceptWhat It Means
2-of-3Need 2 of 3 keys to spend
Wallet descriptorConfiguration file—must be backed up alongside seeds
PSBTPartially Signed Bitcoin Transaction—how multisig transactions are created and signed
Different manufacturersUse hardware wallets from different brands to avoid single-vendor risk
Critical Warning

You must back up the wallet descriptor, not just the seed phrases. Without the descriptor, you cannot reconstruct your wallet even with all 3 seeds.

Understanding the Components​

1. Hardware Wallets (Signing Devices)​

Each key in your multisig lives on a separate hardware wallet. These devices:

  • Generate and store private keys securely
  • Sign transactions without exposing keys
  • Verify addresses on their own screens

Recommended devices for multisig:

DeviceProsCons
ColdcardAir-gapped, Bitcoin-only, excellent multisig supportSteeper learning curve
TrezorUser-friendly, open-source, great Sparrow integrationNo secure element
KeystoneAir-gapped, QR codes, good mobile supportNewer company
BitBox02Simple, secure element, Swiss qualityLimited screen size
LedgerWide compatibility, secure elementClosed source firmware
Best Practice

Use devices from different manufacturers. If a vulnerability is found in one brand, your other keys remain secure.

2. Coordinator Software​

Coordinator software manages your multisig wallet:

  • Creates the multisig configuration
  • Generates receive addresses
  • Creates unsigned transactions (PSBTs)
  • Combines signatures from multiple devices

Recommended coordinators:

SoftwareBest ForPlatform
Sparrow WalletPower users, privacyDesktop
NunchukBeginners, mobileDesktop + Mobile
Specter DesktopNode integrationDesktop
ElectrumTechnical usersDesktop

3. The Wallet Descriptor (Configuration File)​

The wallet descriptor (also called output descriptor) is critical. It contains:

  • All public keys (xpubs) for the multisig
  • The script type (Native SegWit recommended)
  • The M-of-N policy
Example descriptor (simplified):
wsh(sortedmulti(2,
  [fingerprint1/48'/0'/0'/2']xpub1...,
  [fingerprint2/48'/0'/0'/2']xpub2...,
  [fingerprint3/48'/0'/0'/2']xpub3...
))
Critical

You MUST back up your wallet descriptor! Without it, you cannot reconstruct your multisig wallet, even with all seed phrases.

What You Need to Back Up​

Multisig backups are more complex than single-sig. Here's what you need:

For a 2-of-3 Multisig​

ItemQuantityPurpose
Seed phrases3Recover individual keys
Wallet descriptor1Reconstruct the multisig structure
Hardware wallets3Hold the keys for signing

Backup Requirements by Scenario​

To SPEND bitcoin (normal operation):

  • 2 hardware wallets with their PINs
  • Coordinator software with wallet loaded

To RECOVER if you lose 1 key:

  • 2 remaining seed phrases
  • Wallet descriptor

To FULLY RECOVER from scratch:

  • 2 seed phrases (minimum for 2-of-3)
  • Wallet descriptor (containing all 3 xpubs)

Backup Storage Strategy​

Store each item in a different secure location:

Never store:

  • Multiple seed phrases in the same location
  • A seed phrase with its corresponding hardware wallet

Choosing Your Configuration​

2-of-3: The Sweet Spot​

For most individuals, 2-of-3 multisig offers the best balance:

Advantages:

  • Lose 1 key → Still have access (fault tolerance)
  • 1 key stolen → Funds still safe (theft protection)
  • Manageable complexity (3 backups, 3 devices)
  • Lower transaction fees than 3-of-5

What you secure:

  • 3 hardware wallets
  • 3 seed phrase backups
  • 1 wallet descriptor (with 3 copies)

3-of-5: Maximum Security​

For very large holdings or organizations:

Advantages:

  • Can lose 2 keys and still access funds
  • 2 keys can be stolen without fund loss
  • Good for distributed teams/families

Disadvantages:

  • 5 devices to purchase and manage
  • 5 seed phrases to secure (10 locations if you separate!)
  • Higher transaction fees
  • More coordination for signing

2-of-2: Shared Control (Use Carefully)​

⚠️ Not recommended for most users

  • No redundancy — lose 1 key, lose everything
  • Both parties must be available to spend
  • Use only for specific shared-custody scenarios

Collaborative Custody Services​

Don't want to manage all keys yourself? Collaborative custody providers hold one key while you hold the majority.

How It Works​

Providers Comparison​

ServiceFree TierPaid PlansBest For
UnchainedYes (2-of-3)From $0 + per-sign feeFinancial services, loans
CasaBasic walletFrom $30/monthBeginners, inheritance
NunchukYesFrom $15/monthPrivacy, flexibility

Pros and Cons​

Advantages:

  • Professional support and guidance
  • Inheritance solutions included
  • Recovery help if you lose a key
  • Less burden managing all backups

Disadvantages:

  • Monthly fees (some services)
  • Must trust the provider with one key
  • Less privacy (they see your xpubs)
  • Company could go out of business

DIY vs. Collaborative: Which to Choose?​

FactorDIY MultisigCollaborative Custody
Technical skill neededHighLow-Medium
PrivacyMaximumProvider sees balances
Support availableCommunity onlyProfessional help
Ongoing costOne-time (hardware)Monthly subscription
Recovery assistanceYou're on your ownHelp available
Best forTechnical usersBeginners, busy people

My recommendation:

  • New to multisig? Start with collaborative custody to learn the concepts
  • Technical and privacy-focused? DIY with Sparrow Wallet
  • Significant holdings but not technical? Collaborative custody is worth the cost

Common Multisig Mistakes​

Mistake 1: Not Backing Up the Wallet Descriptor​

Problem: You have all 3 seed phrases but can't reconstruct the wallet.

Solution: Store the wallet descriptor (as PDF, file, or printed) with each seed phrase backup.

Mistake 2: Storing Multiple Seeds Together​

Problem: A single theft or disaster compromises multiple keys.

Solution: Geographic distribution — each seed in a different location.

Mistake 3: Using the Same Hardware Wallet Brand​

Problem: A firmware vulnerability affects all your signing devices.

Solution: Mix manufacturers (e.g., Coldcard + Trezor + Keystone).

Mistake 4: Not Testing Recovery​

Problem: You think your backup works but haven't verified it.

Solution: Practice recovery with a small amount before depositing significant funds.

Mistake 5: Overcomplicating the Setup​

Problem: 5-of-7 multisig across 3 continents with time locks...

Solution: Start simple. 2-of-3 is sufficient for most individuals.

Mistake 6: Not Verifying Addresses on Devices​

Problem: Malware could show you a fake address on your computer.

Solution: Always verify receive addresses on your hardware wallet screens before depositing.

Security Checklist​

Before depositing significant funds, verify:

  • Each hardware wallet is from a different manufacturer (recommended)
  • Each seed phrase is backed up on metal (fire/water resistant)
  • Seed phrases are stored in separate physical locations
  • Wallet descriptor is backed up (multiple copies in different locations)
  • You've verified a receive address matches on at least 2 hardware wallets
  • You've successfully completed a test transaction (send and receive)
  • You've practiced full wallet recovery from backups
  • You understand you need M keys to spend (not just one)
  • Hardware wallets are registered with the multisig configuration

Summary​

Multisig removes the single point of failure that makes single-signature wallets vulnerable. With a proper 2-of-3 setup:

  • One key lost? You can still access your bitcoin
  • One key stolen? The thief can't take your funds
  • House fire? Your other keys are in different locations

The tradeoff: More complexity, more items to back up, more coordination to spend.

Is it worth it? For significant holdings you plan to store long-term — absolutely.

Next Steps​

Ready to set up your multisig?

  1. Hardware Setup — Prepare your signing devices
  2. Sparrow Setup — Create your 2-of-3 multisig wallet
  3. Backup & Recovery — Secure your wallet properly