What are Hierarchical Deterministic wallets?

Hierarchical-deterministic (HD) wallets are a type of cryptocurrency wallet that uses a system of key generation based on a hierarchical structure. This allows the wallet to generate unlimited private keys and addresses from a single seed phrase.

In an HD wallet, the seed phrase generates a “master private key,” which derives a tree of private keys and addresses. This tree is called the “key hierarchy”. It can have multiple levels, each with its own set of keys and addresses.

The key hierarchy is determined by a derivation path, a string of numbers and letters that specifies the algorithm used to generate the keys.

Hierarchical Vs Non-Hierarchical deterministic wallets

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Understanding the Basics of Hierarchical Deterministic Wallets.

Before hierarchical deterministic (HD) wallets were developed, most cryptocurrency wallets used a non-HD model for generating and managing private keys and addresses. 

In a non-HD wallet, the user generates a new set of private keys and addresses for each new transaction. And this system could be time-consuming and error-prone.

Non-HD wallets also had limited capabilities for managing multiple accounts and addresses. Users had to generate and store separate keys and addresses for each account or purpose, making it challenging to organize and secure their cryptocurrency assets.

HD wallets were developed as a solution to these problems. 

They use a system of key generation based on a hierarchical structure, which allows them to generate an unlimited number of private keys and addresses from a single seed phrase. This makes it easier for users to manage multiple accounts and addresses and to secure their assets. HD wallets are also more efficient than non-HD wallets, generating new keys and addresses on demand.

And, very importantly, in HD wallets, all keys can be traced back to the seed from which they were created. So the seed is sufficient to recover all private and public keys, which is a considerable advantage.

Hierarchical Deterministic wallet

Master Extended Private Key (Xprv)

The master extended private key is a private key derived from the master seed that includes additional information, such as a chain code and a depth level, which is used to generate a hierarchy of private keys. 

And it is the root of the key hierarchy in a hierarchical deterministic (HD) wallet and is used to generate a set of child private keys, which are used to generate a set of grandchild private keys, and so on.

Hierarchical Deterministic wallet child key

Master Extended Public Key (Xpub)

The master extended public key is a public key that includes additional information, such as a chain code and a depth level, which is used to generate a hierarchy of public keys.

And it is derived from the master extended private key in a hierarchical deterministic (HD) wallet and is used to generate a set of child public keys, which are used to generate a set of grandchild public keys, and so on.

Each level of the key hierarchy is determined by a derivation path, a string of numbers, and letters that specifies the algorithm used to generate the keys.

The master extended public key is not as important as the master extended private key in an HD wallet, as it cannot be used to spend the funds in the wallet. However, it is still valuable for generating and managing public keys and addresses in the wallet.

Advantages of Using an HD Wallet for Managing your Cryptocurrency Assets.

The main advantages of Hierarchical Deterministic (HD) wallets are:

Ease of use: HD wallets are easy because they allow users to manage multiple accounts and addresses with a single seed phrase. This makes it easier to organize and secure their cryptocurrency assets.

Improved security: HD wallets use a single seed phrase to generate an unlimited number of private keys and addresses; users can create unique keys and addresses for each transaction. This makes it more difficult for attackers to compromise their accounts, as they must guess or obtain the seed phrase to access the user’s assets.

Efficiency: HD wallets are more efficient than non-HD wallets because they can generate new keys and addresses on demand, rather than requiring the user to generate a new set of keys and addresses for each new transaction. This saves time and reduces the risk of mistakes.

Compatibility: HD wallets are compatible with different software applications and devices, using a standardized key generation process based on a derivation path. This makes it easy to use HD wallets with different software applications and devices and to transfer assets between them.

Hierarchical Deterministic wallet characteristics

Disadvantages of Using HD Wallets

The so-called ‘disadvantages of using HD wallets’ are worth mentioning because they are not very relevant and can be easily overcome with knowledge and digital safety good practices:

Complexity: HD wallets may be more complex to use than non-HD wallets, as they involve the concept of a key hierarchy and a derivation path.

Dependency on seed phrase: HD wallets rely on the user remembering and securely storing the seed phrase to access their assets. If the user loses or forgets the seed phrase, they will lose access to their assets.

It would take you just a few minutes to learn what a derivation path is and what a seed phrase is, and how to store it safely.

Hierarchical Vs Non-hierarchical deterministic wallet backup

Comparing HD Wallets to non-HD Wallets

The choice between an HD wallet and a non/HD wallet will depend on the user’s needs and preferences. And to make an informed decision, it is worth comparing the advantages and disadvantages of both types of wallets.

Non-HD wallets advantages:

Simplicity: Non-HD wallets are more straightforward to use than HD wallets, as they do not involve the concept of a key hierarchy or a derivation path.

Flexibility: Non-HD wallets allow users to generate a new set of private keys and addresses for each new transaction, which can be useful in some situations.

Non-HD wallets disadvantages:

Inefficiency: Non-HD wallets are less efficient than HD wallets, as they require the user to generate a new set of keys and addresses for each new transaction.

Security risks: Non-HD wallets do not offer the same level of security as HD wallets, as they do not use a single seed phrase to generate multiple keys and addresses. This makes it easier for attackers to compromise the user’s accounts.

Compatibility issues: Non-HD wallets may not be compatible with all software applications and devices, as they do not use a standardized key generation process.

Non-hierarchical wallet characteristics

Hierarchical Deterministic Wallets Examples

HD Cold Wallets

Both Ledger and Trezor are some of the most popular hard wallets (cold wallets) in the market. And both are Hierarchical Deterministic wallets.

Ledger crypto wallet

Cold wallet for desktops and mobile devices.
NON-CUSTODIAL

Trezor crypto wallet

Cold wallet for desktops and mobile devices
Non-custodial

HD hot wallets

There are hundreds of hot wallets in the market but Exodus and Atomic are some of the most known and used hot wallets, and both are HD wallets.

Atomic crypto wallet

Hot wallets for desktops and mobile devices
Non-custodial

EXODUS

Hot wallets for desktops and mobile devices
Non-custodial

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Are you looking for additional information about the same or similar topics?

How to Keep your Crypto Assets Safe

Now that you understand what a Hierarchical Deterministic wallet is and its advantages, you may be interested in increasing your knowledge and learning about digital safety and how to keep your HD wallet safe.

Seed phrase

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

Derivation Path

Learn why a Derivation Path is essential for wallet recovery.
GOOD PRACTICE

And don’t forget to also learn about digital safety good practices because the more good digital safety practices you follow, the more secure your digital assets will be.

Two-Factor Authentication (2FA)

Use 2FA to keep your digital accounts safe from hacks.
GOOD PARCTICES

Everyone Should Have a Burner Wallet

How to protect Your Crypto from Hacks

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