What are hierarchical deterministic wallets (HD)?

I will talk about a wallet standard, which protects privacy, it is the BIP32.

In a previous article I explained what CryptoWallets are and how they work.

Once you have used a wallet address to receive funds, a new one will be generated for you to use. These addresses, also known as public keys , are still governed by a single key pair. This means that the previous addresses you have used can still be used in full, and you will not lose control of them.

One key pair to govern them all

The key pair that governs all your addresses is known as the extended key pair , which consists of the extended public key (xpub) and the extended private key (xpriv) . The more important of the two is the extended private key. This key is the basis from which all the private keys of your addresses are derived. Or in other words: the extended private key is the master key of all private keys belonging to an account. This also means that if someone could get their hands on your extended private key, they would be able to access all the funds in your account.

In contrast, the extended public key can be used to view the balance of all your different addresses. For optimal privacy, it is recommended not to share it.

This extended public/private key pair is only used on cryptocurrencies that make use of hierarchical deterministic wallets; it is not used on crypto assets that do not use changing addresses.

What are the benefits of using an HD wallet?

The “changer” wallet adds two interesting advantages. The most obvious advantage is greater privacy. Blockchains are public ledgers, where anyone can see all transactions and balances. Even having multiple addresses would make it impossible to know the exact balance.

For example, let’s say you have a blog and you allow cryptocurrency donations. You will share one of your addresses on your blog page so that everyone can send you some cryptocurrencies if they wish. That way, since the rest of your balance is in other addresses, they would have no idea of the total funds in your wallet.

There are different standards

  • BIP32 — Hierarchical Deterministic Portfolios

This BIP describes a general structure of the hierarchical deterministic portfolio (HD portfolio). In particular, it defines how to derive the private and public keys of a wallet from a binary master seed (m) and an ordered set of indexes.

  • BIP39 — Mnemonic code for generating deterministic keys

This BIP describes the implementation of a recovery seed and its relationship to the binary master seed BIP32. It consists of two parts: 1) the generation of the recovery seed and 2) the conversion into a binary master seed m including the optional application of a passphrase during the conversion.

  • BIP44 — Multiple account hierarchy for deterministic portfolios

This BIP defines an implementation of an HD portfolio based on BIP32 and BIP43. In particular, it describes the structure of the multi-currency wallet for P2PKH addresses.

  • BIP49 — Derivation scheme for P2WPKH-nested accounts based on P2SH

This BIP defines an implementation of an HD wallet for SegWit P2WPKH-in-P2SH addresses (e.g., 3 addresses in Bitcoin).

  • BIP84 — Derivation scheme for P2WPKH-based accounts

This BIP defines an implementation of an HD wallet for native SegWit P2WPKH addresses (e.g., bc1 addresses in Bitcoin).

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