[Bitcoin-development] New BIP32 structure for P2SH multisig wallets

[Manuel Araoz <manu@bitpay.com>]

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Hi, I'm part of the team building copay <https://github.com/bitpay/copay>,
a multisignature P2SH HD wallet. We've been following the discussion
regarding standardizing the structure for branches both on this list and on
github (1 <https://github.com/bitcoin/bips/blob/master/bip-0032.mediawiki>,
2 <https://github.com/bitcoin/bips/blob/master/bip-0039.mediawiki>,
3<https://github.com/bitcoin/bips/blob/master/bip-0043.mediawiki>,
4 <https://github.com/bitcoin/bips/blob/master/bip-0044.mediawiki>,
5<https://github.com/bitcoin/bips/pull/52>).
Soon, we realized the assumptions in the discussions were not true for a
multisig hd wallet, so we wanted to share our current approach to that, to
get feedback and see if we can arrive to a new standard (and possibly a new
BIP)

These are our assumptions:
 - N parties want to share an m-of-n wallet.
 - Each party must generate their master private keys independently.
 - Use multisig P2SH for all addresses.
 - Use BIP32 to derive public keys, then create a multisig script, and use
the P2SH address for that.
 - The address generation process should not require communicating with
other parties. (Thus, all parties must be able to generate all public keys)
 - Transaction creation + signing requires communication between parties,
of course.

-------------------------------------------------

Following BIP43, we're be using:


m / purpose' / *

where *purpose* is the hardened derivation scheme based on the new BIP
number.
We then define the following levels:


m / purpose' / cosigner_index / change / address_index

Each level has a special meaning detailed below:

*cosigner_index* <http://en.wikipedia.org/wiki/Co-signing>: the index of
the party creating this address. The indices can be determined
independently by lexicographically sorting the master public keys of each
cosigner.

*change*: 0 for change, 1 for receive address.

*address_index*: Addresses are numbered from index 0 in sequentially
increasing manner. We're currently syncing the max used index for each
branch between all parties when they connect, but we're open to considering
removing the index sync and doing the more elegant used-address discovery
via a gap limit, as discussed in
BIP44<https://github.com/bitcoin/bips/blob/master/bip-0044.mediawiki#address-gap-limit>.
We feel 20 might be too low though.

*Wallet high-level description:*
Each party generates their own extended master keypair and shares the
extended purpose' public key with the others, which is stored encrypted.
Each party can generate any of the other's derived public keys, but only
his own private keys.

*General address generation procedure:*
When generating an address, each party can independently generate the N
needed public keys. They do this by deriving the public key in each of the
different trees, but using the same path. They can then generate the
multisig script and the corresponding p2sh address. In this way, each path
corresponds to an address, but the public keys for that address come from
different trees.

*Receive address case:*
Each cosigner generates addresses only on his own branch. One of the n
cosigners wants to receive a payment, and the others are offline. He knows
the last used index in his own branch, because only he generates addresses
there. Thus, he can generate the public keys for all of the others using
the next index, and calculate the needed script for the address.

*Example: *Cosigner #2 wants to receive a payment to the shared wallet. His
last used index on his own branch is 4. Then, the path for the next receive
address is m/$purpose/2/1/5. He uses this same path in all of the cosigners
trees to generate a public key for each one, and from that he gets the new
p2sh address.

*Change address case:*
Again, each cosigner generates addresses only on his own branch. One of the
n cosigners wants to create an outgoing payment, for which he'll need a
change address. He generates a new address using the same procedure as
above, but using a separate index to track the used change addresses.

*Example: *Cosigner #5 wants to send a payment from the shared wallet, for
which he'll need a change address. His last used change index on his own
branch is 11. Then, the path for the next change address is
m/$purpose/5/0/12. He uses this same path in all of the cosigners trees to
generate a public key for each one, and from that he gets the new p2sh
address.


*Transaction creation and signing:*
When creating a transaction, first one of the parties creates a Transaction
Proposal. This is a transaction that spends some output stored in any of
the p2sh multisig addresses (corresponding to any of the copayers'
branches). This proposal is sent to the other parties, who decide if they
want to sign. If they approve the proposal, they can generate their needed
private key for that specific address (using the same path that generated
the public key in that address, but deriving the private key instead), and
sign it. Once the proposal reaches m signatures, any cosigner can broadcast
it to the network, becoming final. The specifics of how this proposal is
structured, and the protocol to accept or reject it, belong to another BIP,
in my opinion.

*Final comments:*
- We're currently lexicographically sorting the public keys for each
address separately. We've read Mike Belshe's comments about sorting the
master public keys and then using the same order for all derived addresses,
but we couldn't think of any benefits of doing that (I mean, the benefits
of knowing whose public key is which).
- We originally thought we would need a non-hardened version of purpose for
the path, because we needed every party to be able to generate all the
public keys of the others. With the proposed path, is it true that the
cosigners will be able to generate them, by knowing the extended purpose
public key for each copayer? (m/purpose')
- The reason for using separate branches for each cosigner is we don't want
two of them generating the same address and receiving simultaneous payments
to it. The ideal case is that each address receives at most one payment,
requested by the corresponding cosigner.


Thoughts?
Manuel

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