Home CryptocurrencyBitcoin What are Hierarchical Deterministic (HD) Crypto Wallets?

What are Hierarchical Deterministic (HD) Crypto Wallets?

by SuperiorInvest

A hierarchical deterministic wallet generates public and private keys from a master key, allowing users to create a new wallet and obtain all addresses and keys if they have access to the seed. Conversely, non-deterministic wallets randomly generate wallet addresses and private keys, limiting users’ ability to recover addresses and keys if wallet details are lost.

Usually digital signatures and pairs private and public signing keys are used in blockchain-based cryptocurrencies. This means that users spend their money by signing a transaction with a private key, and other users (recipients) can use the public key to validate the signature. Private keys can be used to generate public keys, but not vice versa.

For example, a user Bitcoin wallet contains a set of private keys that allow the owner to spend any bitcoin (BTC) associated with these keys. Bitcoin wallets randomly generated BTC addresses and private keys when the user needed them. Such types of digital wallets are called non-deterministic (ND) wallets.

However, since keys are not generated in any pattern, users must create a backup of each key whenever a new one is generated. This means that if wallet details are lostall addresses and keys will also be lost.

This type of Bitcoin wallet is also known as a “just-a-buch-of-keys” (JBOK) wallet because it produces unrelated keys and requires users to track their transactions every time they buy and sell their cryptocurrencies. So what are Hierarchical Deterministic (HD) wallets?

Hierarchical deterministic wallets replaced JBOK wallets as users could back up HD wallets a single seed and greatly benefit from extended keys. A wallet that generates its public and private keys from a seed is therefore called a hierarchical deterministic wallet.

These wallets can be used for various interesting things like trust audit, online shopping and distribution of departmental funds by treasurer. For example, an individual could disclose their master public key to external auditors, who could then use that key to view any future transactions made with BTC. In this case, the user’s resources are safe because the private keys associated with those resources are never exposed.

An overview of the differences between HD and non-HD wallets is given in the table below:

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