Derivation Paths And Their Essential Role In Wallet Recovery

Mostly anyone with a cryptocurrency wallet knows it is vital to take note of the wallet seed phrase and safely store it.

Because the seed phrases are essential to recovering crypto wallets.

But while it is true that writing the wallet seed phrase is essential, it may be just not sufficient to recover your wallet:

– In a few years, your wallet app may not exist anymore. And recovering your wallet to a new app that uses doesn’t implement BIP standards, may lead to your crypto assets not being displayed or displayed showing the incorrect balance.

– If you pass away without leaving enough details or instructions, without the derivation path, your heirs may not be able to recover the wallet with just the seed phrase or miss to recover part of the crypto assets.

To be 100% sure to recover a wallet from a seed phrase, you should also write down other details, like the derivation path.

Wallet derivation path

After all, if needed, you want to ensure that you and your loved ones can restore your crypto wallets from your seed phrases in a distant future. And for that, taking note of the derivation path may prove essential.

crypto inheritance planning

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What is a Derivation Path and Why is so Important

A Derivation Path is a string of numbers and letters that specifies the algorithm used by Hierarchical Deterministic (HD) wallets to generate the private keys for an account. 

It determines the sequence of keys that will be generated and the addresses associated with those keys.

And learning about derivation paths is crucial for you because without the correct derivation path, you may have difficulties restoring a wallet account:

– If a wallet app does not implement BIP standards, restoring the seed phrase created by that wallet app to a different wallet app that implements BIP standards may not derive the same keys.

– If your current wallet app does implement the BIP standards, but a new wallet app does use different standards, e.g., different purpose, restoring the seed phrase created by your current wallet app to the new wallet app will not derive the same keys.

why a wallet seed phrase may not enough for wallet recovery

Will you or your heirs be able to restore your wallets and recover your crypto assets in a few years? 

Find out by learning about Mr.ChadCryptoWhale5000’s story:

Wrong Derivation Path
A Proven Way To Lose Your Crypto
MEDIUM

Understanding the Hierarchy of a Derivation Path

The most common way to specify a derivation path is using the BIP-44 standard, which defines a hierarchy for deterministic wallets. 

Hierarchical Deterministic (HD) Wallets

Find out what is an HD wallet and how the key generation system works.
KNOWLEDGE

The sequence “m / purpose’ / coin_type’ / account’ / change / address_index” represents a hierarchical deterministic (HD) path used in the context of BIP32 (Bitcoin Improvement Proposal 32), which is a standard for creating hierarchical deterministic (HD) wallets.

This path is commonly used in the BIP44 (Bitcoin Improvement Proposal 44) standard, which defines a multi-account hierarchy for different cryptocurrencies within a single wallet.

Let’s use the Bitcoin derivation path as an example: m/44’/0’/0’/0/0.

m (Master Key) – m/44’/0’/0’/0/0.

The ‘m’ stands for the master key, which is the starting point of the HD wallet. It is a root key from which all other keys in the hierarchy are derived. This key is usually generated from a random seed or a mnemonic phrase.

purpose’ (Purpose) – m/44‘/0’/0’/0/0.

The ‘purpose’ is a constant hardened derivation index. The apostrophe (‘) indicates a hardened key, meaning it cannot be derived directly from the master key but only from a hardened parent key. The purpose field specifies the purpose of the key derivation. For example, purpose’ 44 is commonly used for BIP44, a standard for multi-account hierarchical deterministic wallets.

coin_type’ (Coin Type) – m/44’/0‘/0’/0/0.

The ‘coin_type’ is another hardened derivation index specifying the cryptocurrency type. Each cryptocurrency has a unique coin type. For example, Bitcoin is typically associated with coin_type’ 0, while Ethereum is associated with coin_type’ 60.

account’ (Account Index) – m/44’/0’/0‘/0/0.

The ‘account’ field represents the account index and is a non-hardened derivation index. It indicates which account within the specified coin type is being accessed. Users may have multiple accounts within the same coin type, allowing for better organization of funds.

change (Change)- m/44’/0’/0’/0/0.

The ‘change’ field is a non-hardened derivation index distinguishing between receiving and change addresses. A value of 0 typically indicates a receiving address, while 1 indicates a changed address. This is useful for managing transactions and improving privacy.

address_index (Address Index) – m/44’/0’/0’/0/0.

The ‘address_index’ is a non-hardened derivation index specifying the index of a specific address within the account. It is used to generate unique addresses for receiving or change purposes.

why you need to learn what a derivation path is

Bitcoin Improvement Proposal (BIP)

BIP standards have been mentioned several times in this post. And while knowing in detail what BIPs are is not that important, you should have a high-level knowledge.

Bitcoin Improvement Proposals (BIPs) are technical documents describing proposed Bitcoin protocol changes. They are used to communicate ideas for improving the Bitcoin network and gather community feedback.

BIPs are written by Bitcoin community members and reviewed and discussed by other members. If a BIP is deemed a good idea and has received sufficient support, it may be implemented in a future version of the Bitcoin software.

There are several types of BIPs, including:

Standard BIPs: These proposed changes to the Bitcoin protocol are intended to be adopted by all implementations of the Bitcoin software.

Informational BIPs: These provide information about Bitcoin or related technologies but do not propose specific changes to the Bitcoin protocol.

Process BIPs: These describe changes to creating and reviewing BIPs.

The BIP process is an open and transparent way for Bitcoin community members to propose and discuss improvements to the Bitcoin network. BIPs are an essential part of the development of the Bitcoin protocol and have been used to propose and implement many significant changes to the network over the years.

Practical Example of Private Key Generation Using a Seed Phrase and Derivation Path

Now that you understand how a wallet uses the seed phrase and the derivation path to create private keys, you may want to cement that knowledge by putting it into practice.

As a visual example, the learnmeabitcoin.com website has a tool that takes as input the seed phrase and the derivation path and calculates the private key.

How different derivation path create different keys.

You will notice that the private key will change if a different derivation path is used.

And now imagine yourself in 10 years trying to recover a wallet from a seed phrase and trying to figure out what is the correct derivation path because your crypto assets are not displayed or displayed but with the incorrect balances.

Most probably, you will be able to manage by trial and error. But instead, you may consider taking note of the derivation paths along the seed phrases.

Derivation Path FAQ

The questions from others are windows to knowledge that we may need, but we never consider what we missed.

What is a seed phrase?

A seed phrase is a series of words used to generate a private key for a cryptocurrency wallet. This phrase typically consists of 12, 18, or 24 words and is used to derive multiple cryptocurrency addresses.

Seed phrase

Learn what is a seed phrase and why it is so important.
KNOWLEDGE

What is a private key?

A private key is a secret number that allows you to access and manage your cryptocurrency assets. It is generated using a seed phrase and can be used to derive multiple cryptocurrency addresses.

Wallet private keys

Learn why your wallet's private keys are important.
KNOWLEDGE

What is a public key?

A public key is a cryptographic key that is derived from a private key. It is used to receive cryptocurrency and is shared with others to receive payments.

Public key

What is a public key, and what is it used for?
KNOWLEDGE

What is a change address?

A change address is a type of cryptocurrency address that is used to receive change from a transaction. When a cryptocurrency transaction is made, any excess funds are sent to a change address instead of being returned to the original address.

What is a gap limit?

A gap limit is the maximum number of unused addresses that a cryptocurrency wallet will generate in a derivation path. It is used to prevent attackers from guessing or brute-forcing private keys by limiting the number of possible addresses.

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