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- HD wallets offer multi currency support adding the benefit to account recovery and enhancing security and privacy.
- HD wallets were made as a Bitcoin standard with BIP 32 and it can be backed up by storing a single seed of 64 bytes.
A hierarchical deterministic wallet is a digital wallet used to store the digital keys for holders of cryptocurrencies such as Bitcoin or Etherum. A hierarchical deterministic (HD) wallet generates a new key pair at every new time of crypto transaction. This new key is generated from the master key pair.
It’s hierarchical structure is like a tree. The child keys are derived from a single master key. Each child key is defined by its path which contains its full information because it resides in its tree structure.
Intelligent HD Wallet Structure
Every master key produces same set of keys with deviated paths. This allows users to backup a single seed instead of hundreds of keys. Thus user can use parent public key instead of using the private key. Seed here refers to the piece of data used to generate public and private keys.
Before HD wallet, non-deterministic(ND) bitcoin (BTC) wallets generates random key pairs to use and change addresses. They are not linked so we had to back up each key pair and also need to keep track of transaction keys when buying and selling the cryptos. This is because it has no master key. Later on, due to so many lackings it is replaced by HD wallets.
HD wallets has gained popularity due to its structure of owning a master key. All the other addresses are generated from a single master key. So all we need to understand is this that master key is the foundation which then branches out to other private keys.
A cryptocurrency wallet contain two keys the public key and the private key. Public key which acts as account number or basically the address of the account which anyone can have access to. Private key acts like the key by which the holder can transfer funds to any other account. To authorize the transaction you should have access to private key.
These crypto wallets provide better enhanced security because keys are derived automatically for every transaction. It means every transaction has different address. We have multiple addresses, others may not know which address we are linked to. And also, they need multiple keys to access the wallet. But, if anyone shares the XPUB then it can show all our balances.
HD makes it difficult to share your information for security reasons. They prevent hacking as it randomly creates the key. There is one more HD wallet with Bitcoin Improvement Proposal (BIP) 39, which allow user to store their master key pairs and their wallet as a recovery phase.
Recovery phase is 12-, 18-, or 24- word phrase that must be sequenced and stored safely for recovery. This will help you get a backup of wallet. This must be secured properly because if you ever misplace or forgot the recovery phrase you can lost your funds forever.
Thus, HD wallets are the most advanced type of deterministic wallets having keys in a tree fashion where a parent key can produce a children key, which can further produce grandchildren keys and so on. The holder can organize the transaction and the entity.
Andrew is a blockchain developer who developed his interest in cryptocurrencies while pursuing his post-graduation major in blockchain development. He is a keen observer of details and shares his passion for writing, along with coding. His backend knowledge about blockchain helps him give a unique perspective to his writing skills, and a reliable craft at explaining the concepts such as blockchain programming, languages and token minting. He also frequently shares technical details and performance indicators of ICOs and IDOs.
