Hierarchical Deterministic Wallet (HD Wallet) is the term used to refer to the digital wallet used by users of cryptocurrencies to store or keep digital keys.
Users with a private and public key can control the cryptocurrencies in the account. Keys are generated randomly and backed up to the wallet to prevent hacking. The HD wallet allows a set of key pairs to be generated from a random seed. Therefore, the HD wallet provides convenience, manageability and a high level of security.
In the cryptocurrency world, wallets contain keys. A cryptocurrency wallet has two keys, a public and a private key. The public key acts like an account number. The private key acts like a password and is used to transfer cryptocurrencies. The combination of the public and private key provides security against hackers and anonymity for transactions. The key pair helps to perform cryptocurrency transfer transactions. Private keys are randomly generated because it is very important that the private key remains secure.
Each key and the associated investment must be backed up to prevent irreversible loss to the owner. However, in order to preserve the confidentiality that enables the creation of cryptocurrencies and to limit the use of public keys, it is necessary to create a new key pair for each transaction.
The deterministic wallet was created to provide a solution where all keys can be observed up to an original random seed, a set of random words and hash functions in general. The original source through the deterministic wallet is sufficient to recover the entire private and public key. Therefore, only one backup is needed at the time of creation.
What Are Deterministic Wallet and Hierarchical Deterministic Wallet?
A hierarchical deterministic wallet is considered the most advanced type of deterministic wallet. In HD wallets, the master key generates subkeys, which in turn generate other keys. The cryptocurrency owner can use the tree structure to organize transactions by transaction type or by the relevant institution.
HD wallets, like deterministic wallets, are created from a single main root seed and are usually expressed in a mnemonic string of words. This makes them easy for account holders to store. HD wallets also offer the option to generate a public key without having to provide access to the corresponding private keys. Using only a public key means that it can only be used in receive mode.
A hierarchical deterministic wallet generates public and private keys from a master key, allowing cryptocurrency users to create a new wallet and receive all addresses and keys as long as they have access to the core.
HD wallets can greatly benefit from keys that users can back up and extend HD wallets using a single seed. Therefore, a wallet that generates its public and private keys from a seed is a hierarchical deterministic wallet.
How Does Hierarchical Deterministic Wallet Work?
A hierarchical deterministic wallet generates a new key from a master key pair for each cryptocurrency transaction to increase security and anonymity.
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. The seed, commonly represented as a mnemonic expression, is considered a piece of information used to generate both the public key and the private key. A random sub-private key is also generated from a master private key, and matching sub-public keys can be generated by anyone who knows the master public key.
What Are the Advantages and Disadvantages of Using a Hierarchical Deterministic Wallet?
The advantages of a hierarchical deterministic wallet are the following:
- The hierarchical deterministic wallet allows master public keys to be shared with other users without jeopardizing assets. This improves users' privacy.
- The hierarchical deterministic wallet allows investments to be diversified over a large number of addresses. This makes HD wallets secure.
- Because the hierarchical deterministic wallet spreads investments over several addresses, it requires users to access a number of different private keys to gain access to their cryptocurrencies. This is an indication that it offers security to users.
- Due to the structure of the hierarchical deterministic wallet, each private key generated by the seed has the potential to be used as a private key that can then use a deterministic wallet to generate other keys.
The disadvantages of hierarchical deterministic wallets are the following:
- Hiyerarşik deterministik cüzdan, yatırımların çok sayıda adres üzerinden çeşitlendirilmesi durumunda eğer ana anahtar ya da özel anahtar ifşa edilirse büyük bir varlık kaybı yaşanma durumu yaşanabilir.
- A hierarchical deterministic wallet, where investments are diversified over a large number of addresses, can result in a large asset loss if either the master key or the private key is compromised.
