Understanding Hierarchical Deterministic (HD) Wallets: How a Single Seed Powers Multiple Wallets?

In this article, I’ll take you through the world of HD Wallets, delving into their internal mechanics and various use cases. If you’ve ever used web wallets like Phantom or MetaMask, you’ve likely interacted with HD Wallets without even realizing it. Let’s dive right into the fascinating functionality of HD Wallets.

What are HD Wallets?

HD Wallets are a specialized type of wallet that can generate a tree of key pairs (both public and private) from a single seed. This capability allows for the creation of multiple wallet addresses from just one seed, greatly enhancing convenience and organization.

Without HD Wallets, managing multiple wallets would require storing each wallet's individual key pairs which can be confusing and leads to burden of storing many keypairs. But HD Wallets makes our life easier by generating a mnemonic(a series of words) that allows us to create multiple wallets from a single seed phrase.

The term "hierarchical" indicates that HD Wallets create a tree-like structure for generating key pairs from the master seed. The "deterministic" aspect means that a specific master key will always produce the same tree of keys in a consistent manner.

Understanding BIP-32

Bitcoin Improvement Proposal 32 (BIP-32) addresses the significant challenge of managing various key pairs for different wallets. It introduces a hierarchical tree-like structure for wallets, enabling the management of multiple accounts that share the same key pairs. This structure allows you to derive both private and public keys from a single master seed, greatly simplifying the recovery process for cryptocurrency wallets.

What are mnemonics and seed phrase?

A mnemonic is just a series of human readable strings that is used to generate the master seed for the HD Wallet. It was introduced in BIP-39 (Bitcoin Improvement Proposal-39) and this proposal suggests randomly selecting a series of words—typically 12 or 24—from a predetermined set of 2,048 words, which can be found in the GitHub repository linked below.

BIP-39 Mnemonics

Here is what a random mnemonic for a web wallet looks like -

A seed phrase is just a binary number that is derived from the mnemonic phrase.

Understanding Derivation Paths

Derivation paths is a well defined way to derive various keys from the master seed. They enable us to recreate the same set of private keys from the seed across different wallets, ensuring consistency. This means you can use the same secret seed to access a wallet on various platforms, such as Phantom and MetaMask.

A derivation path has a format like m/purpose/coin_type/account/change/address_index

Now let us understand each of the above term -

• m: This points to the primary node or the main level of the wallet structure.

• purpose: A fixed value that determines the wallet's intended standard, such as 44' for BIP44, a well-known guideline for hierarchical wallets.

• coin_type: Represents the type of cryptocurrency, with identifiers like 0' for Bitcoin, 60' for Ethereum, and 501' for Solana. The creator of derivation paths was smart enough to foresee that more cryptocurrencies would be created in the future.

• account: Defines the specific account number within the wallet, such as 0' for the primary account.

• change: A designation of either 0 or 1, where 0 usually refers to external addresses (used for receiving funds), and 1 refers to internal addresses (used for handling change).

• address_index: A progressive counter to create a series of addresses under the same account and change pathway.

So the general structure of a HD Wallet comes out to be:

Conclusion

In conclusion, HD Wallets offer a powerful and efficient way to manage your cryptocurrency assets. By utilizing a single seed phrase, these wallets allow you to generate a tree of key pairs, simplifying the process of storing and accessing multiple wallet addresses. The introduction of BIP-32 and BIP-39 has revolutionized how we handle key pairs and mnemonic phrases, making recovery easier and more secure. Understanding derivation paths further enhances the versatility of HD Wallets, ensuring you can use the same seed across various platforms like Phantom and MetaMask without losing consistency. As the cryptocurrency landscape continues to evolve, HD Wallets will remain a vital tool for users seeking both convenience and security in managing their digital currencies.