By this time, you must have heard about cryptocurrency wallets.
If not, then do consider reading our detailed guide here:
But let’s explore what a wallet really is…
Here I will be using the example of Bitcoin as most of you are familiar with it, but this applies to almost all cryptocurrencies and their supporting wallets.
So in short, the place where you have both your Bitcoin address to receive bitcoins and the private key to send/spend bitcoins is called a Bitcoin wallet.
In an even more simplified way, a wallet is a digital file which stores your bitcoins.
- Bitcoin Address + Private Key = Bitcoin Wallet
Since the inception of Bitcoin and other cryptocurrencies, numerous types of wallets have mushroomed. And why not? Wallets are the fundamental user interface through which a person interacts with the cryptocurrency system.
With a simple Bitcoin wallet, you can be your own bank and move across borders without any questions asked.
Isn’t it amazing!?
But this was actually not possible in the early days of Bitcoin when “HD wallets” were not yet there.
Typically, in Bitcoin wallets, a pair of private/public addresses (or keys) is randomly generated. This requires you to take a backup each time you make a new pair of addresses.
However, at the start, you might feel that this process is easy. But slowly, it will become more and more complicated and cumbersome to track/backup so many private/public addresses as the number of your transactions increase.
Moreover, if you are a person who cares about financial privacy and does frequent transactions, then you might need to generate a lot of private/public pair of addresses (or keys).
Which means more backups!
On the other hand, some wallets re-use the same Bitcoin address for all transactions to avoid losses, which can happen from the loss of a backup. This is not a very healthy practice and can compromise your financial privacy.
And that’s why HD wallets were developed under the BIP 32 (aka Bitcoin Improvement Proposal 32).
What are HD Wallets?
Imagine how easy it would be if there were a mechanism to somehow generate a pattern of public/private keys that couldn’t be guessed and needed no complicated backup.
Well, there is!
Such easy to use wallets are called HD wallets.
HD is an abbreviation for Hierarchical Deterministic. All HD wallets use 12-word master seed keys. Each time this seed is appended by a counter at the end and is used to derive seemingly unlimited new Bitcoin addresses hierarchically and sequentially.
Since all the address are derived from a single master seed, you only need to worry about backing it up. That’s why it is called Hierarchical Deterministic.
What happens inside an HD wallet?
HD wallets generate a hierarchical tree-like structure of keys which start from the seed master key based on BIP 32. When you restore an HD wallet using the seed key, the wallet goes ahead and drives all the private keys of the tree using BIP 32.
And as soon as the scanning of keys is completed on the network…
Ta da! You are done, and your funds are recovered!
While using an HD wallet, the backing up of the seed key is mandatory and should be kept safe so that you can restore your wallet in case your device is lost or damaged.
And this is the beauty of HD wallets. Taking a backup only once means that all subsequent addresses can easily be re-created mathematically from the algorithm. HD wallets use a one-way SHA-256 hash algorithm which produces this tree of keys without any error if the input (or seed key) is the same.
Advantages of HD Wallets
- You need to backup only one key (i.e. “seed key”). It is the only backup you will ever need.
- You can generate many receiving addresses every time you receive bitcoins.
- You can protect your financial privacy.
- Confuse new users, as your receiving address changes every time.
Popular HD Wallets
There are various types of HD wallets available now in the market. Some of them are paid and some are free. Here is the list of the most popular ones:
|Type of wallet||Available Platforms||Paid/Free||Key Features|
|1||Ledger Nano S||Hardware Wallet||Windows,|
|Best buy at $65||HD Wallet|
|Best buy at $99||HD Wallet|
|Best buy at $99||HD Wallet|
Chrome & Firefox Extensions, Mac/Linux
I hope this insight on HD wallets will help you in making the right choice for yourself.
Do let me know which HD wallet you are using for your bitcoins or altcoins in the comments section below.
And if you find this post useful, do share it with your friends on Facebook & Twitter!
For further reading: