Climbing The Crypto Security Tree: How Hierarchical Deterministic Wallets Work

2 mins read

Investing in crypto is getting simpler with barriers to entry becoming easier to overcome. Yet, many newcomers are unaware of the risk involved in using the same wallet.

So how do you avoid that problem? The easy answer is with a hierarchical deterministic wallet. 

What is a cryptocurrency wallet? 

A cryptocurrency wallet is a platform or an app where you manage and store all of your crypto assets. The wallet interface allows end-users to create the addresses they need to receive and send crypto. 

The addresses have a private key associated with them. Without that private key, the funds associated with the address cannot be moved. 

In the beginning, you needed new keys to create new addresses. It was like creating a new email to avoid getting hacked. This was very tedious and people just took the easy way out by using the same address over and over again. 

This is when hierarchical deterministic wallets enter the scene. 

What Is A Hierarchical Deterministic Wallet?

A hierarchical deterministic wallet or HD Wallet allows a user to generate an infinite amount of addresses using the same seed for each one of them.

They use a single seed of 12, 18, or 24 keywords. This seed then allows the users to create a sort of hierarchical tree-like structure of private and public addresses. The mission here is to avoid having the user having to generate new keys every single time. HD wallets do everything for you - as long as you don't forget your seed. 

The Science Behind An HD Wallet: How The Seeds Sprouts a Tree

This seed is based on a Bitcoin Enhancement Proposal, known as the BIP 32. This offers one of the highest levels of security in crypto. Hacking an HD wallet is quite complicated — all thanks to BIP 32. 

BIP 32 is the technology that allows the wallet to create the hierarchical tree structure. The user uses the seed to sprout this secure tree for his or her funds. And most importantly, even if the physical wallet is damaged, you will be able to recover all the keys using the backup of the seed. 

Recommendations for Your HD Wallet Seeds

There are a few recommendations that you need to follow to use an HD Wallet. 

First thing first: the seed is what unlocks everything... so make sure to back it up right away. If you lose your phone or hardware wallet, you can still have access to your funds — but only if you kept the backup. 

Second, write your seed on a piece of paper. Don't save it on your phone — let alone Drive or a note app. Not even on your computer. If you ever get hacked and the hacker finds that seed out, say goodbye to your funds. So it’s best to write it down manually. 

There's a reason why the keywords are written in the order they are. When writing down your seed, write it in the same order you see. If you don't write it in the same order, you may lose access to your funds — even if you have the seed.

Write your seed at least three times and save it in different safe places. It is a piece of paper — it can get lost. So you’ll want to have several backups to your backup.

Try one HD wallet and say hello to a new step of security for your crypto.