What Is a Hierarchical Deterministic (HD) Wallet?
A hierarchical deterministic (HD) wallet is adigital walletcommonly used to store the digital keys for holders of cryptocurrencies such as Bitcoin and Ethereum. Anyone with a copy of both the public and password-like private key can control the cryptocurrency in the account.
Key Takeaways
- A hierarchical deterministic wallet is a digital wallet commonly used to store the keys for holders of cryptocurrencies such as Bitcoin and Ethereum.
- To prevent hacking these keys must be randomly generated and backed up in the wallet.
- HD wallets enable a series of key pairs to be created from one random seed, providing convenience and manageability as well as high-level security.
Understanding Hierarchical Deterministic (HD) Wallets
In the cryptocurrency world, wallets contain keys instead of coins. A cryptocurrency wallet has two keys: a public key or address, which acts much like an account number, and a private key that the holder uses to transfer funds to other accounts. The private key is much like a password. Someone transferring Bitcoin from their account, for example, would use their private key to authorize the transaction.
This combination of public and private keys is designed to ensure security from hackers as well as anonymity in transactions. Because the pair of keys enables the transfer of someone's cryptocurrency, it is critical that the private key remains safe. To this end, the keys are generated randomly.
Each key must be backed up in the wallet to prevent it and the funds it is linked to from becoming irrevocably lost to the owner. But to ensure privacy—one of the purposes driving the creation of Bitcoin and other cryptocurrencies—and limit the use of public keys to one transaction each, a new pair of keys would need to be created for each transaction. This can get difficult to manage over time.
Deterministic wallets were created to offer a solution, one in which all keys can be traced back to an original random seed, usually a set of random words, and a hash function. With a deterministic wallet, the original seed is enough to recover all private and public keys, therefore requiring only a single backup at the time of creation.
Deterministic vs. Hierarchical Deterministic Wallets
HD Wallets are the most advanced type of deterministic wallet. They contain keys in a tree structure, in which parent keys can produce children keys, which can produce grandchildren keys, and so on, infinitely. The cryptocurrency holder can use the tree structure to organize transactions by type of transaction or by entity involved, such as departments or subsidiaries.
Like simple deterministic wallets, all HD wallets are created from a single master root seed, usually represented by a mnemonic word sequence, which makes it easier for account holders to transcribe and store. But HD wallets also offer the option of creating public keys without having to access the corresponding private keys. This means they can be used on insecure servers or in a receive-only mode.
FAQs
What Is a Hierarchical Deterministic (HD) Wallet? A hierarchical deterministic wallet is a crypto wallet that uses a hierarchical structure to derive key pairs (your public and private keys). On a basic level, this allows you to manage multiple accounts with a single crypto wallet.
What is HD wallet in crypto? ›
A hierarchical-deterministic (HD) wallet generates a new key pair from a master key pair for each crypto transaction to enhance privacy and security. Its hierarchical structure resembles that of a tree, with the master key “determining” the key pairs that follow it in the hierarchy.
What advantages do hierarchical deterministic HD wallets have over just a bunch of keys JBOK wallets? ›
A hierarchical deterministic wallet generates infinite public and private keys from a single master key. Hence, users can create new wallets and retrieve their assets and keys. In these wallets, users can easily back up the wallets using a single seed phrase. They also get a lot of benefits from extended keys.
What is hierarchical deterministic HD key derivation? ›
Hierarchical deterministic key generation involves creating a theoretically infinite tree of cryptographic secrets. The root of this tree from which everything is generated is called the master node. The master node is derived directly from the master binary seed described in the previous section using HMAC-SHA512.
What is hierarchical deterministic? ›
A hierarchical deterministic (HD) wallet describes a wallet that generates all its keys from a single recovery phrase in a tree-like pattern. This recovery phrase can be used to recreate the entire wallet, even if the wallet is lost or damaged.
What is hierarchical deterministic HD protocol? ›
A Hierarchical Deterministic Wallet, also known as an HD wallet, is a type of cryptocurrency wallet that employs a specific algorithm called the Hierarchical Deterministic algorithm. This algorithm generates a sequence of private and public key pairs from a single, randomly generated seed phrase.
What is a deterministic wallet? ›
A deterministic wallet is a system of deriving keys from a single starting point known as a seed.
What are the benefits of HD wallet? ›
So basically, an HD Wallet allows you to generate billions of private keys using a single seed. So as long as you remember the seed, you'll always be able to recover the same keys and addresses. This makes them much more user-friendly than early bitcoin wallets that generated and stored private keys individually.
What are the advantages of HD wallet? ›
✔︎ Efficient Backup and Recovery
The efficiency in backup and recovery is a notable advantage of HD wallets. With a single master seed to secure, users can seamlessly back up and recover their entire wallet.
Which crypto wallet type is considered as the most secure? ›
Cold storage (i.e. offline storage) methods, such as hardware wallets and paper wallets, are considered to be the most secure way to store cryptocurrency.
Public and Private Keys in Crypto Wallets
Typically, crypto wallets each use a private and public key. To clarify, your public key can be shared with anyone. Conversely, your private key is the code that will allow anyone access to the funds stored at that public address.
What is the difference between deterministic and non deterministic wallet? ›
There is no particular pattern as to how the keys are derived and hence we need to create a backup of the keys each time there is a new one. In a deterministic wallet, on the contrary, the private keys are related because they originate from the same key called seed, as shown here on the right-hand side of the diagram.
What is a hierarchical deterministic address? ›
A Hierarchical Deterministic (HD) wallet is the term used to describe a wallet which uses a seed to derive public and private keys. HD wallets were implemented as a Bitcoin standard with BIP 32. Before this, most wallets generated unrelated keys each time a user required a new address.
What is a deterministic key? ›
Deterministic Authenticated Encryption with Associated Data (Deterministic AEAD) produces stable ciphertexts: encrypting a given plaintext always returns the same ciphertext. It is symmetric, which means it uses a single key for both encryption and decryption.
What makes keys hierarchical? ›
Definitions: A multiple-level tree structure such that each node represents a key and each branch – pointing from one node to another – indicates a key derivation from one key to another key.
Is MetaMask a hierarchical deterministic wallet? ›
The Bitcoin Improvement Proposal (BIP) led to the development of a wallet structure that resembles a hierarchical tree. In an HD wallet like MetaMask, a single master key is generated from the wallet seed, which is then used to generate subkeys, each of which can generate its own sub-branches.
What are deterministic wallets? ›
A deterministic wallet is a system of deriving keys from a single starting point known as a seed.
How does a hierarchical deterministic HD wallet obfuscate one's identity on a blockchain? ›
Understanding Hierarchical Deterministic (HD) Wallets
Someone transferring Bitcoin from their account, for example, would use their private key to authorize the transaction. This combination of public and private keys is designed to ensure security from hackers as well as anonymity in transactions.
Is MetaMask a deterministic wallet? ›
However, any additional accounts you create can be re-created in a future instance of MetaMask. As the wallet is deterministic, it will always re-create the same accounts, in the same order.
