Understanding Hierarchical Deterministic (HD) Wallets

• Hierarchical Deterministic Wallets are crypto wallets that generate infinite public and private keys from a seed or single master key
• The wallet is based on the BIP-32 standard and is considered the most advanced type of deterministic wallet

Within the crypto world, wallets hold the keys rather than coins. These keys are fundamentally of two sorts: open keys and private keys. Whereas the public key is an address that acts similar to an account number, the private key allows the holder to exchange stores and acts like a password.

Wallets store private keys, but at the same time, they also generate private keys. There are two types of wallets based on how keys are made: deterministic and non-deterministic wallets.

In a deterministic wallet, the secret codes are created from a starting point. The wallet used 12-24 words to create a 512 bit seed. A unique key is created with this small thing. An infinite number of public and private keys may be created using this unique key.

In contrast, a non-deterministic wallet generates private keys at random that are not linked to each other. In this case, the owner is required to create a copy of every key they make since they are made randomly.

The most advanced type of deterministic wallet is a hierarchical deterministic wallet. They are considered feasible as users can easily back up their wallets using a single seed phrase. 

What Are Hierarchical Deterministic (HD) Wallets?

As the name suggests, Hierarchical Deterministic wallets generate infinite public and private keys in a hierarchical manner. It means that master keys create the children’s keys, and the children’s keys further create the grandchildren’s keys. The whole process takes place in a family tree model. 

The Bitcoin Investment Proposal (BIP) -32 has introduced the concept of Hierarchical Deterministic wallets. These wallets have enhanced the recoverability of wallets,, as a single seed phrase could recover all the keys in the entire wallet. They also improved the interoperability of wallets. 

The workings of these wallets are the same as those of deterministic wallets. There is a 512 bit seed from which a master key derives. This master key generates child keys. Further, these child keys are capable of generating their own child keys. The master key has an extended pair of the private key (XPRIV) and the public key (XPUB).

XPRIV generates all the child private keys, while XPUB replaces the child public keys, creating an easy way to generate the addresses. Examples of platforms that support these wallets are Ledger Nano S and Trezor. 

Advantages of HD Wallets

• The wallet enhance the privacy of the users, as they only need to share the master public key and not other keys
• These wallets are considered more secure as the funds are diversified across multiple addresses.
• The hierarchical nature of the wallets helps the users generate more child keys and the child keys act as a master key for the further child keys
• It is difficult to trace the funds in the wallets as there are multiple keys and addresses
• Users can easily retrieve their assets and keys by using a single seed phrase

Disadvantages of HD Wallets

• They have a single point of failure, which means that if someone knows the master key, then the users can lose access to all the funds
• Hackers can easily steal all the funds if the seed phrase is revealed.

Conclusion

In a nutshell, Hierarchical Deterministic Wallets have provided users with more security and privacy with their innovative technology. However, there is less adoption of these wallets in the crypto space. But, in the near future, they may be recognized and see wide adoption by the mainstream.