Hierarchical Deterministic Wallet (HD Wallet)

What is an HD Wallet?

HD wallets stand for Hierarchical Deterministic wallets. They were introduced by BIP32. They were improved by BIP 44, lately. Here, the BIP stands for Bitcoin Improvement Proposal and is a standard for proposing any protocol changes to Bitcoin. The HD wallet was introduced for bitcoins, however, presently the wallet supports a range of digital currencies. With the help of HD wallets, a whole suite of crypto wallets can be produced from a single seed phrase.

HD wallet can also be described as a digital wallet that is efficient in generating a hierarchical tree-like structure of public and private keys. Therefore, the HD wallet allows the generation of keys and the user is no longer required to generate a key.

Frequently Asked Questions (FAQs)

How do HD wallets work?

Cryptocurrency coins or tokens are stored in a standard crypto wallet. The wallet has both public and private keys. The public key is used for receiving funds from a party and the private key is used to spend the coins or tokens stored in the wallet.

The private and public key ensures that the cryptocurrency is safe but it adds overhead for the users as he/she will require to generate a new pair of the public and private key for executing a trade. With the increase in transactions, it will become difficult for the user to manage all the public and private keys.

This is when the HD wallets come into the play as they solve the problem by generating keys from a single seed and hierarchies are created from the master seed. The HD wallets have a variant for the standard 12 word master seed. With the increase in the transaction, the seed is extended from the end and automatically it becomes possible to generate an infinite number of keys or addresses.

With an HD wallet, the user does not require to generate a new key address, but the user only has to create a backup.

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What are the features of HD wallets?

• A single seed is used which is generally composed of 12, 18 or 24 keywords.
• The user only requires to back up the single seed. In case of loss or damage to the wallet, the backup will restore the keys and the funds.
• An infinite number of key pairs can be generated with a single seed for a range of cryptocurrencies. It happens due to the BIP 32 which allowed generation of keys in a hierarchical manner.
• The user’s privacy can be maintained as the HD wallet allows the generation of multiple public addresses which is used for receiving payments from different sources.
• The security component is increased with the employment of HD wallets as the new pair of keys are generated for the new transaction and it becomes difficult to hack the wallet.
• The continuous development in HD wallets allows them to be compatible with different systems.
• It also produces a master public key and allows the user to see the direction of all the transactions. It is generally used by auditors or reviewers who want to assess the transactions which have taken place in the wallet.

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What things should be considered while using HD wallets?

• It is evident that seed is the most critical and crucial component of an HD wallet as the fund can be restored to the seed only. Therefore, it is recommended that the seed should have a proper backup. The seed’s configurations should be copied exactly as they are displayed on the HD wallet or else the user might face huge losses.
• The seed should be protected and safeguarded. The loss or theft of seed will result in the loss of funds. The person who has access to the seed will automatically gain access to the funds even if they have a different system.
• The seed should not be stored digitally as digital platforms like email, computers, smartphones can be hacked very easily. It is recommended that seed should be stored in a written form, on a piece of paper.
• While writing down the seed, it is recommended that the user is out of reach of any camera or any outside person.
• As the seed is recorded in paper, it can be damaged by the environment, therefore, it should be stored in a place where the environment cannot affect it.
• Some HD wallets allow the creation of configurations. So, it is recommended that the phrases should be designed very carefully. It should not be related to the user or the pattern should not be detectable (for example, birth date).
• The wallets might not be compatible with all the cryptocurrencies. So, while transferring the seed from one wallet to another, it should be ensured that it is compatible with the currency owned by the user.

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What are the benefits of HD wallets?

HD wallets increase the privacy of crypto transactions significantly. A blockchain is a ledger, whose transactions can be seen publicly and the data related to the transactions is publicly available. Therefore, the privacy can be questioned. However, with HD wallet, multiple private and public key combinations are created, and it becomes difficult to know the exact transactions that have taken place.

For example, an organisation has opened themselves for the bitcoin donations. A master key address will made available to the people who are interested in donation. Since, a new address is generated for every new user, one doner cannot see the donation made by the other user. Therefore, the privacy is intact.

Moreover, the private keys are diversified, the hacker won’t be able to access all the funds. For gaining access to the user’s fund, the hacker needs all the private keys which is complex and difficult.

What are the advantages of HD wallets?

• Only the seed key needs to have a backup and all the other data, and the funds will have backup automatically.
• Multiple public keys can be generated whenever the user is receiving cryptocurrency bitcoins or tokens.
• The financial privacy is high.
• The new user can be confused easily as new key or address is generated every time.