HD wallets explained

HD wallets (hierarchical deterministic wallets) are cryptocurrency wallets that can generate public and private addresses (keys) randomly from a single seed key. They use a pattern that prevents other users from guessing your combinations and passwords.

Its ability to generate an infinite number of combinations makes the HD wallet a useful asset for cryptocurrency owners looking to improve the security of their tokens and transactions on the blockchain.

They are referred to as hierarchical deterministic as this type of cryptocurrency wallet generates a hierarchical tree-like structure of private/public key pairs, all starting from the same 12-word master seed key.

The node can produce an infinite number of children (not the human kind). What this basically means is that it can support multiple accounts in different cryptocurrencies, each one with an impressive amount of unique addresses.

How HD wallets work

If you use a cryptocurrency wallet to store your tokens, you already know that you need a public address to receive funds and a private key for spending the funds. Thanks to this public/private combination of keys, wallets can ensure the safety of your tokens and the privacy of all your transactions.

However, the number of combinations grows with every new transaction you do, making storage and backup more complicated with every new purchase.

Without a special algorithm in place, it’s unmanageable for users to keep generating new pairs of public/private keys. Especially since every pair that you create also needs to be backed up after the configuration.

HD wallets solve this problem. They use an SHA-256 hash algorithm to produce a tree structure of children addresses without any errors. As a user, you no longer need to create new addresses continually, nor wait for the secure key to be generated.

You only need to take care of the backup, which becomes faster and easier as you can do it using a single seed phrase.

Users avoid losses caused by a lack of backups

Hierarchical deterministic wallets require a single backup that enables the user to fully restore the data at any time in the future. This is because of the wallet’s ability to drive all the private keys of the tree using BIP 32. This is a transfer protocol that enables parent keys to create child keys in a hierarchy.

So, when you have to restore an HD wallet, the system automatically drives all the private keys of the tree using the same initial algorithm.

The secret key is easier to remember as well, so users don’t risk losing access to their funds. It’s also a more convenient solution, as you don’t have to store the secret key for each address that you’ve generated, only for the seed key.

Another advantage of the hierarchical deterministic system is the ability to create a new wallet using the same seed. This can be a useful feature when you need to recover your wallet due to a corrupt drive, for example. In this case, an HD wallet allows you to get all the addresses and private keys back using the same seed key.

HD wallets provide higher anonymity

Giving someone else access to your cryptocurrency wallet is like sharing your bank account information with strangers. Losing or having your public/private keys stolen means saying goodbye to your digital assets. So, security is one of the essential features of HD wallets.

With an infinite number of combinations of public/private keys available, you can generate as many receiving addresses as you wish. So, every time you receive or send cryptocurrency, you can use a different address to keep your transaction history secret and your overall activity anonymous.

The more public addresses you use, the lower the chances of someone getting hold of information about your balance or linking an address to you based on a kind of buying habits analysis. This adds an extra layer of secrecy to your everyday transactions and helps you protect your financial privacy in the long run.

Common HD wallets

HD wallets are available as hardware, mobile, and desktop wallets – some of them are free and others paid. Among the most popular are Trezor, KeepKey, Ledger Nano S, Mycellium, Jaxx, and Electrum.

HD wallets are a comfortable way to store your tokens, as they secure your transactions and make your activity hard to track on the blockchain. They also include a convenient way of backing up your seed key, enabling you to recover any lost data and giving you more control over your transactions.