What is an HD Compliant Wallet?
(Part 1 - Generating public/private key pairs - BIP 32)

• VS
• 21 Aug, 2023

Introduction

An HD wallet is a digital wallet that helps you manage your cryptocurrencies like Bitcoin, Ethereum, and others in an organized and secure way. HD stands for "hierarchical deterministic," which means these wallets use advanced cryptography to generate a chain of addresses from a single seed phrase. This seed phrase is like a master key that helps you access and control all the cryptocurrencies you hold within the wallet.

Historical Context and Purpose

HD compliant wallets were introduced as a solution to some challenges faced by earlier cryptocurrency wallets. In other crypto wallet types, people had to manually manage different private keys for each address where they stored their cryptocurrencies. This was complex and made backup and recovery a tedious task.

This was not only complex but also posed security and privacy risks. HD wallets were invented to simplify this process. They were first proposed in a Bitcoin improvement proposal (BIP32) in 2012 and later expanded upon with BIP39 and BIP44. HD wallets, together with BIP32, BIP39 and BIP44 provide the full functionality of required of a crypto currency wallet:

1. BIP 32: Easily generate public/private key pairs
2. BIP 39: To provide an easy wallet recovery experience.
3. BIP 44: Multi-blockchain support

They have paved the way for various wallet software and hardware devices that offer HD features, ensuring that users can easily manage their digital assets while minimizing the risk of losing access to their funds.

This article will focus on the BIP32 part of the functionality. It will specifically discuss how Hierarchical Deterministic Wallets generate public/private key pairs.

There are 2 other articles on HD wallets. To learn about the how HD wallet provide an easy wallet recovery experience read the article at this link. To learn about the how HD wallet provide support for multiple blockchains read this link.

Terminology

Before jumping directly into its mechanism, let’s go through terminology related to it.

Seed Phrase

Think of the seed as the starting point of your wallet. It's a special secret phrase made up of 12, 15, 18, 21 or 24 words. The number of words is dependent on the wallet being used and user preference. This phrase is super important because it's is a key that can generate all the addresses in your wallet. Imagine it as the seed (pun intended) of a tree that grows your wallet addresses (the leaves).

Mnemonic

This is another way of saying "seed phrase." It's a group of words that make up the key to your wallet. Mnemonics are used to make it easier for you to remember the important phrase that holds the power to access your wallet.

Private Key

Imagine this as a secret code that only you know. It's like your personal password corresponding to a particular public key. With the private key, you can move your money around and make transactions.

Public Key

Think of this as your wallet's public address, like an email address where others can send you messages (or money). It's a code generated from your private key. People can see your public key, but they can't do much with it except send you money or messages.

How Does it Work?

First let’s focus on the “Hierarchal” part

Instead of using just one address, this wallet gives you many addresses. It’s like having a keychain, on which each key can open multiple doors. Each door gives access to a different set of funds.

To start using this wallet, you get a secret phrase called a "seed." This phrase is like a key that helps the wallet create all your addresses and corresponding private keys. To continue on our prior analogy with the keychain, there is a master key on the key chain (the seed), which can open all the doors. A lock smith can use the master key, to carve out any of the other keys as well. It's important to keep this seed phrase safe.

Another analogy is to think of your wallet as a tree. The seed is (pun intended) the “seed” of the tree, and each address (I.e. public/private key pair) is like a leaf. The wallet keeps making new leaves whenever you need new ones. It’s a hierarchy of addresses.

Now lets focus on the “Deterministic” part

If you lose your device, no need to worry! Using the seed phrase, you can recover your wallet back on a new device. It's like planting your wallet tree again. The key point is that your get the exact same tree every time, that’s what the deterministic part means. A particular seed will generate exactly the same private and public keys in every single wallet recovery.

So that’s how a Hierarchical Deterministic wallet works.

Benefits of a HD Wallet?

Using an HD wallet is simple and keeps your money safe. It's hard for others to see all your transactions because you can generate new addresses at any time. This helps keep your financial information private.

Even though you have many addresses, you don't need to remember them all. The wallet takes care of that for you. It's like having a smart money tree that keeps your digital coins secure and easy to use.

Why is It Important to manage seed phrases?

Seed phrases play a critical role in the security and accessibility of your digital assets. They act as the master key that enables you to regain control over your funds in case of device loss, damage, or theft.

The security of both software and hardware wallets depends heavily on seed phrases. If a user’s wallet is lost, stolen, or damaged, they ensure they get their funds back with the seed phrase. By securely keeping your seed phrase, you can maintain total control over your wallet and the crypto it contains.

Ronyn's Approach to HD Wallets

The Ronyn Wallet (both hardware and software wallets) implement a full HD compliant BIP 32 wallet and provides additional security through the BIP 39 pass phrase. Bitcoin Improvement Proposal (BIP) 39 specifies the addition of a pass phrase with the seed phrase. This pass phrase secures the seed phrase in the case that the seed phrase is compromised.

With the Ronyn Wallet if someone gains access to the seed but not your pass phrase, then your assets are still safe. This is because the wallet requires both the seed and the passphrase to access the wallet’s assets. With the Ronyn Wallet & Vault users prioritize state-of-the-art cryptography with and use cold storage techniques that adhere to the highest standards in order to secure their assets.

References:

To read more about HD wallets refer to the following:
BIP32: https://github.com/bitcoin/bips/blob/master/bip-0032.mediawiki
BIP39: https://github.com/bitcoin/bips/blob/master/bip-0039.mediawiki
BIP44: https://github.com/bitcoin/bips/blob/master/bip-0044.mediawiki