What are hierarchical deterministic (HD) crypto wallets?

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

Typically, digital signatures and private and public signing key pairs are used in blockchain-based cryptocurrencies. That said, users spend their money by signing a transaction with the private key, and other users (recipients) can use the public key to confirm the validity of the signature. Private keys can be used to generate public keys, but not vice versa.

For example, a user’s Bitcoin wallet includes a set of private keys that allow the owner to spend any Bitcoin (BTC) tied to those keys. When the user needed them, Bitcoin wallets randomly generated BTC addresses and private keys. These types of digital wallets are called non-deterministic (ND) wallets.

However, since the keys are not generated in any model, users must make a backup of each key each time a new one is generated. That said, if the wallet details are lost, all addresses and keys would also be lost.

This type of Bitcoin wallet is also known as a “just a bunch of keys” (JBOK) wallet because it produces independent 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 since users could back up HD wallets using a single seed and greatly benefit from extended keys. Therefore, a wallet that generates its public and private keys from a seed is called a hierarchical deterministic wallet.

These wallets can be used for a variety of intriguing things, such as trustless auditing, online shopping, and the treasurer’s distribution of departmental funds. For example, a person can leak their master public key to external auditors, who can then use that key to view all future transactions made using BTC. In this case, the user’s funds are secure because the private keys linked to these funds are never revealed.

The summary of the differences between HD and non-HD wallets is listed in the table below:

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