Before we get into the nitty-gritty of what an HD Wallet is and why they are important, let’s start with what crypto wallets are. The term “wallet” is a bit misleading since a crypto wallet doesn’t store any coins. In fact, cryptocurrency never actually leaves the blockchain.
Not Your Key, Not Your Coins
When you make a cryptocurrency transaction there is no movement of crypto coins in the same way fiat currency is transferred from one bank account to another.
Instead, when you use your private key to approve a transaction it generates a signature that is broadcast to the blockchain network. The network then adds your transaction to the public ledger to reflect the new balance on your address.
It used to be that with every blockchain transaction, a new private and public key was generated which were unrelated to the previous keys. This meant that users had to back up their key and wallet information after every single transaction.
As the blockchain has grown, there have been many improvements to this “Just a Bunch of Keys” system. But the real breakthrough came with BIP32 (Bitcoin Improvement Proposal), which introduced Hierarchical Deterministic Wallets and extended keys.
So, What Are Hierarchical Deterministic Wallets?
A Hierarchical Deterministic Wallet, or HD wallet for short, is a privacy-centered wallet for address generation, key management, and recovery.
What makes it different from other wallets is the type of key pair management that allows generating multiple new addresses from a root seed, which is essentially a long string of data. This data is formatted into 12-24 words (seed phrase or mnemonic phrase) to make it more user-friendly.
The seed automatically generates a tree-like structure of child private and public keys that are derived from a master key pair— otherwise known as an extended private key (xPriv) and an extended public key (xPub).
The “hierarchical” aspect of the HD wallet comes from the fact that each child key can generate its own child keys, which can generate their own, and so on and so forth, thus creating a system of hierarchy.
The “deterministic” part means that a given master key will always generate the exact same tree, with the exact same keys in the exact same way.
These two main characteristics are what allow users to back up billions of keys as long as they have a single seed phrase.
The Benefits of an HD Wallet
Although HD wallets were developed by Bitcoin, they are now a standard wallet structure supporting multiple currencies. They are particularly useful for custody companies, software companies, and accounting as they can provide a quick and easy view of every single account and transaction.
- Easy Backup and Recovery: The deterministic and hierarchical system means the wallet can be easily regenerated and recovered in its entirety with the use of a single seed phrase.
- Blockchain Agnostic: An unlimited number of unique addresses can be created for multiple cryptocurrencies.
- Greater Privacy: A user can generate different keys for each transaction so transaction history and exact overall balance are hidden from public view.
- Security: The private key is always stored offline, meaning no risk from hacking or other cyberattacks.
- Convenience and Efficiency:No need to back up every address after every transaction. Using the seed phrase, you back up only the extended keys once, and every child key and their associated addresses come with it.
The Edge of an HD Wallet
1. A new login method has been added. You can log in to SuperEx directly with your email password or HD wallet.
2. No password, no verification code, no 2FA
3. No security verification is required for deposit and withdrawal, only wallet authorization is required
4. No need to enter address for deposit and withdrawal