If you didn’t know, almost any modern bitcoin wallet is an HD wallet. U.Today explains what is so special about deterministic wallet.
Hierarchical deterministic (HD) wallets generate new addresses with each new transaction, which significantly complicates the task of hacking the wallet. HD keys are an algorithm that divides the storage of public and private keys into several parts. When it comes to an impressive transaction, you can simply divide it into several parts, making it impossible to track the amount of money you send or receive.
Gregory Maxwell, a brilliant cryptographer who is considered one of the first Bitcoin developers, was behind the original idea of the HD wallet.
Types of cryptocurrency wallets
Type 1 (consecutive wallets). Private keys are derived from several combinations of numbers. This type of wallet has a significant drawback - you must back up each wallet separately because it is impossible to recreate a long private key.
Old-fashioned Bitcoin wallets will require a fresh backup. Blockchain.info served as a springboard for the introduction of HD-wallets. However, it should be noted that the phrase was needed only to unlock the wallet from their server.
Type 2 (hierarchical wallets). Wallets can be restored from the original seed, which facilitates the backup process. Case in point: Electrum wallets, However, the BIP-32 wallets went a little further, presenting a tree structure, which was later improved using BIP-44.
Before you start using any HD wallet, you will need to write an initial phrase, which usually looks like this.
Addresses and Accounts
In all BIP44-compatible wallets, addresses are divided into accounts. To simplify the task, let's imagine ordinary bank accounts - your funds can be redistributed among several accounts. HD wallets work in the same way (except for the fact that here you are dealing with cryptocurrencies). Each account has “endless” external and internal chains that allow you to create millions of addresses.
Wallet Compatibility
Most of the popular HD wallets have already implemented the following standards: BIP-32, BIP-39, BIP-44. Therefore, you can send funds to another sender, who also implemented these standards. Pay attention to the fact that there are some discrepancies in the implementation of these standards (for example, BIP-39 wallets are not compatible with other wallets due to the fact that they use the same suppliers).
BIP-32 details the process of creating a hierarchical wallet.
BIP-39 describes the implementation of mnemonic phrases, in addition to giving a good understanding of how these phrases are created. The list of applications that support the BIP-39 mnemonic system includes:
- Mycelium.
- Breadwallet.
- Dark wallet.
- Multibit.
BIP-44 offers a special tree hierarchy describing a structure that contains several accounts.
Are phrases of 12 words safe?
However, you may still wonder how safe these 12 words are. To determine this, one Reddit user went on a math adventure.
It is also worth noting that different wallets have different dictionary sizes. For example, Trezor has 4096 words, which allows you to create ~ 10 ^ 43 combinations. The table below shows the level of security each dictionary can offer.
After that, the Reddit user went further, calculating the hacking time that would be required to violate the security of the HD wallet, using the power of Antpool, the largest mining pool owned by the crypto-hippo Bitmain. It will take almost 1012 years to calculate all these combinations (for comparison, the age of the whole universe is only 109 years).
NB! Some wallets also allow seeds of 12 words (13 words or even 24 words)
HD wallets warnings
Although HD wallets are a huge step forward, they also have some drawbacks. For example, some developers allow their users to set passphrases themselves, which compromises their security.
It is also not recommended to divide the seeds between wallets from different software / hardware wallets (as mentioned above, not all wallets meet the same standards). As a result, it may be difficult for you to access certain coins, given that they are not exchangeable.
Yes, it is clear that mnemonic phrases are pretty much safe (unless singularity happens, and we all do not merge with robots). However, this does not mean that your wallet is also secure (as soon as you lose your backup phrase, you lose access to your wallet and funds).
Your mnemonic phrase should be stored in a safe place that no one else can access. If you happen to enter a phrase in advance (and your laptop saves it), there is a high probability that some of your friends will actually be able to use a copy of your wallet to transfer funds.
ZCash, for example, uses Sapling shielded HD Wallet to provide users with a higher level of privacy.
Wallet setup
Now that we have defined what HD wallets are, let's focus on the configuration process. If you want to create an address for a specific currency, you must follow the recommendations provided by coin issuers.
The private key of the address node is used to sign the transaction.
As mentioned above, all modern wallets are of HD type.
- Connect Ledger to your computer.
- Enter PIN to unlock wallet.
- Write down the recovery phrase (make sure you have this recovery sheet!).
- NB! Do not use hardware wallets with pre-filled recovery phrases.
- You did! (now you can use any Ledger-compatible wallet)
Beyond Crypto
Despite the fact that HD-wallets were originally created by the Bitcoin development team, they can be used for any coin (for example, Ledger supports many altcoins).
It goes even further than this: HD wallets have found many use cases outside the realm of cryptocurrency (passwords, PGP keys, SSH keys). For example, Ledger, a leader in the hardware wallets industry, has already introduced a password management application.
I hope, now you better understand how deterministic wallets work. U.Today wishes you a safe investment in cryptocurrency!
