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Hierarchical deterministic wallets generate public and private keys from the master key, and if the seed is accessible, users can create new wallets and retrieve all addresses and keys. Conversely, non-deterministic wallets randomly generate wallet addresses and private keys and restrict users. Ability to restore addresses and keys in case wallet details are lost.
Blockchain-based cryptocurrencies typically use a digital signature and a private and public signing key pair. This means that users can spend money by signing transactions with their private keys, and other users (recipients) can use their public keys to check the validity of their signatures. A private key can be used to generate a public key, but not the other way around.
For example, a user’s Bitcoin wallet consists of a set of private keys that allow the owner to spend any Bitcoin (BTC) linked to those keys. The Bitcoin wallet will randomly generate her BTC address and private key when the user needs them. This type of digital wallet is called a non-deterministic wallet (ND).
However, the keys are not generated in an arbitrary pattern, so the user should make a backup of each new key as it is generated. This means that if wallet details are lost, all addresses and keys are also lost.
This type of Bitcoin wallet is also known as “Just-a-bunch-of-keys”. (JBOK) wallets need to generate irrelevant keys and track transactions every time a user buys or sells cryptocurrencies. So what is a hierarchical deterministic (HD) wallet?
Hierarchical deterministic wallets have superseded JBOK wallets because users can back up their HD wallets with a single seed and benefit greatly from extended keys. Wallets that generate public and private keys from a seed are therefore called hierarchical deterministic wallets.
These wallets can be used for a variety of interesting things, such as untrusted audits, online shopping, and departmental fund distribution by accountants. For example, if an individual discloses their master public key to an external auditor, the external auditor can use that key to view future transactions made using BTC. In this case, the user’s funds are safe. This is because the private keys linked to these funds are never published.
The table below outlines the differences between HD and non-HD wallets.
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