When a user creates a multisig wallet, they generate multiple private keys — say, three keys in a 2-of-3 setup. The addresses corresponding to these keys are then derived according to the BIP-011 standard.

To initiate a payment, the wallet holds the transaction unsigned until approvals are received from the requisite number of private keys—in this case, two keys. Once enough signatures are collected, the fully signed transaction is broadcast to the network for confirmation.

The two main types of multisignature wallets are local and hosted multisig wallets. In a local wallet, you control all private keys yourself across different devices. On the other hand, hosted wallets involve a third party, like a crypto exchange, holding one key while you retain control over other keys.

While hosted wallets improve convenience, they also increase counterparty risk if the hosting service gets hacked or shuts down. Local wallets eliminate this risk but require more hands-on setup and key management. The ideal approach depends on your specific needs around security, custody, and usability.

The key advantages of multisig wallets are enhanced security owing to key redundancy and the requirement of multiple approvers. Even if one key is compromised, funds stay protected.

This makes them extremely suitable for high-value holdings. Additionally, the increased layers of authentication help prevent honest mistakes.

That said, multisignature also has some drawbacks. Transactions require more sign-offs, slowing the payment process. Configuring and managing the keys across devices adds to the setup complexity.

There is also a risk of key loss or deletion if proper backups are not maintained. Exchanging keys for recovery requires physical coordination, which may not always be possible.

To summarize, multisignature wallets provide rock-solid security, but at the cost of reduced usability compared to single-key wallets. The trade-off needs to be evaluated based on an individual's risk tolerance and the fund amounts involved.

Here are some of the multisig wallet use cases:

• Business finances. Multisignature wallets allow distributing authorization across departments and roles for payroll, vendor payments, etc.
• Family offices. Heirs can set up multisig wallets, requiring approval from independent guardians to release funds.
• Crypto savings. Investors protect long-term holdings through multisig instead of leaving coins on exchanges.
• Escrow services. Marketplaces hold seller/buyer funds in multisig until deals are finalized.
• Treasury management. Nonprofits and governments use stablecoins in multisig setups for transparency and control.
• Joint ventures. Partners painlessly co-manage shared address books and approvals for partnership accounts.

By introducing approval layers, multisig wallets unlock highly secure custodial models across both personal and institutional use cases with reliable stablecoins.