What Is a Hierarchical Deterministic (HD) Wallet?
Let me explain what a hierarchical deterministic (HD) wallet is—it's a digital wallet that you commonly use to store the digital keys for cryptocurrencies like Bitcoin and Ethereum. If someone has both the public key and the password-like private key, they can control the cryptocurrency in that 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 world of cryptocurrency, you should know that wallets hold keys, not the coins themselves. Your cryptocurrency wallet comes with two keys: a public key or address, which works like an account number, and a private key that you use to transfer funds to other accounts. Think of the private key as your password. For instance, when you're transferring Bitcoin from your account, you authorize it with your private key.
This setup with public and private keys is there to protect you from hackers and to keep transactions anonymous. Since these keys allow the transfer of your cryptocurrency, you must keep the private key secure. That's why keys are generated randomly.
You need to back up each key in the wallet to avoid losing it and the funds linked to it forever. But for privacy—one of the main reasons Bitcoin and other cryptocurrencies exist—and to limit each public key to one transaction, you'd have to create a new key pair for every transaction. This gets hard to manage as time goes on.
Deterministic wallets solve this by letting all keys trace back to an original random seed, usually a set of random words, using a hash function. With a deterministic wallet, you only need that original seed to recover all your private and public keys, so you just back it up once when you create it.
Deterministic vs. Hierarchical Deterministic Wallets
HD wallets are the most advanced form of deterministic wallets. They organize keys in a tree structure, where parent keys generate child keys, which can then generate grandchild keys, and this can go on infinitely. As a cryptocurrency holder, you can use this tree to organize your transactions by type or by the entities involved, like departments or subsidiaries.
Just like basic deterministic wallets, all HD wallets start from a single master root seed, often a mnemonic word sequence that you can easily write down and store. But HD wallets give you the added ability to create public keys without needing access to the private keys. This lets you use them on insecure servers or in a receive-only setup.
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