What Are HD Wallets? [Deterministic Wallet]

Modern-day cryptocurrency wallets are very easy to use !!

But this was not the case earlier because, in pioneering days, users of cryptocurrencies (i.e. Bitcoin) were used to back-up their private keys every time after each transaction.

Also, the earlier crypto wallets don’t use to suggest new addresses for each transaction automatically. Instead one needed to do that part of changing addresses manually.

And this meant taking back up of private key for that address too.

This way it was quite cumbersome and confusing to keep a back-up of as many private keys related to as many addresses that you have used.

Also, there were some users who used to use the same Bitcoin address to send/receive BTC every time and I think you already know that this is not a recommended thing to do as this can compromise your privacy.

But things have changed now and we have come a long way in improving the usability of Bitcoin like cryptocurrencies and amongst it, the thing that has made life easy for crypto users is HD Wallets.

So let us see what is it?

What Is HD Wallet?

We all have heard about cryptocurrency wallets, which are actually the fundamental user interface for accessing any cryptocurrency.

They are the basic brick-and-mortar thing that a cryptocurrency will need and in this article, I will be referring to Bitcoin currency because that is the most popular one.

And amongst Bitcoin wallets, there are special-purpose wallets called HD wallets.

HD wallets (aka hierarchical deterministic wallets) are those wallets that use a single 12 or 18-word seed phrase to generate the subsequent pairs of private and public keys in a crypto wallet.

This 12 or 18-word seed is also known as seed phrase or mnemonic phrase that is used to determine subsequent addresses and private keys in wallet software.

Example Seed Phrase: witch collapse practice feed shame open despair creek road again ice least

Hence using this type of wallet solves the cumbersome problem of frequent wallet back-ups as you are now required to safely back up only the seed.

So this type of wallet is called Hierarchical Deterministic (HD wallet).

How Does Bitcoin HD Wallet work?

The working of HD wallets is quite straightforward based on deterministic maths which is defined under Bitcoin Improvement Protocol 32 (BIP 32)

Using the BIP 32 maths, HD wallets generated a hierarchical tree-like private key structure originating from the seed of 12 or 18 words.

For example, see this key generation of a Bitcoin HD wallet (Mycelium):

The Mycelium Bitcoin wallet uses the 12-word mnemonic seed to generate first the master private key and then this master private key is iterated with counters like (+1, +2, +3 or in any other pattern) to generate respective private keys and Bitcoin addresses.

That’s why as a user you are only required to back up this 12-word mnemonic seed because ultimately all the pairs are generated from this only !!

If you have noticed while using modern HD wallets like Ledger Nano X or Coinomi this magic of seed happens when we restore our Bitcoin wallets.

When restoring your HD wallet using a 12-word seed, the wallet asks you to enter your seed correctly and then takes a moment to calculate/determine all the private/public key pairs.

And Abracadabra !!

You are done and your funds get restored on the wallet.

Since the key pairs can be calculated or determined using the HD wallet’s mnemonic that’s why these wallets are called Deterministic Wallets

Advantages Of HD Wallets

HD wallets are not only native for Bitcoin, but many other cryptocurrency wallets have now incorporated this concept for various cryptocurrencies.

And when this has been done for almost all cryptocurrencies it means it certainly has advantages over the old way of doing wallets, so let us see what those advantages are:

  • You only need to back up seed words, and that’s the only thing you need to keep your funds safe.
  • Same seed can be used to derive key pairs of different cryptocurrencies.
  • n-Number of public addresses can be generated hence preventing re-use of addresses.
  • If you lose the back-up of a private key from the hierarchical tree still your other addresses will remain safe.
  • Restore your wallet in any BIP32 wallet with your seed.
  • Move millions of dollars across borders without using a hardware wallet or mobile wallet app.

So these are some of the hindsight advantages of HD wallets but I am sure with the maturity of cryptosphere many more usecases and advantages will spring.

List Of Best HD Wallets For Bitcoin

Now, I know you must be wanting to know which are the best HD wallets in the market and that’s why we have listed some of the best HD wallets here:

Best Bitcoin HD Wallets Cost
Ledger Nano X (Hardware Wallet) $70
Trezor (Hardware Wallet) $70
KeepKey (Hardware Wallet) $99
Mycelium (Mobile Wallet) Free
Jaxx (Mobile Wallet) Free
Electrum (Desktop Wallet) Free
Atomic Wallet (Desktop Wallet) Free

HD wallets as I said are now available for many currencies including Bitcoin, and the above wallets that I have listed are also good as Ethereum (ETH) HD wallets.

Conclusion: Which HD Wallet To Choose?

Well, which HD wallet to choose is really up to you, but if you are not using HD wallets, then you should give them a try.

Also, now Bitcoin Core’s wallet is also an HD wallet so you need to worry about taking frequent back-ups because core developers incorporated this feature in Bitcoin core in 2016.

So now I think the concept of HD wallets is pretty much clear to everyone.

And lastly, I hope that misconceptions like ‘HD wallets cannot regenerate the private key using mnemonics’ are also now cleared and users might use HD wallets freely.

Now you tell us: Which HD wallet do you use for your bitcoins or altcoins? Are there any more reliable HD wallets that you have tested? Do tell us in the comments below and we will be happy to list it here 🙂

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Sudhir Khatwani


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