By Larry Wright
If you have previously associated yourself with the crypto market, even as a beginner, then you already know the importance of cryptocurrencies and how these entities are reshaping our financial world.
There was a time when digital payments were simply out of the question; people used to go to the banks or whatever financial instruments they had back in the day to get stuff in order, which was not only time-consuming but also focused intensively which kind of diverted people from the work or jobs they should be tending to in the first place.
A lot has changed in the modern financial space as digital payments have literally made the lives of common men easier than these were before. A newer and redefined version of the financial world is upon us by the name of the crypto market; it has multiple cryptocurrencies that are digital alternatives of the Fiat currencies having their own blockchain medium on which these can remain operational, but there is a catch here.
These crypto entities are completely decentralized, which means that they don’t have a physical existence, neither they do have a centralized command dictating each and every move that they have to make, just like a commercial bank, stock market, or any other centralized financial entity out there.
This major difference has lured people into believing that the crypto market is the most secure entity out there, and no doubt in that logic, it sure is, but the volatility aspects of cryptocurrencies are a bummer.
You might be buying crypto today to expect heavier returns in the coming years, only to know that after a few months have passed, the whole cryptocurrency that you have bought has tanked, and its market shares are falling like dice of domino, and there is no rescuing the inevitable. So, yes, crypto entities and decentralized finance is efficient and secure but, at the same time, too volatile for the common man to even think about approaching it.
However, this article is not focused on the crypto market or cryptocurrencies but on the security of these entities, and as a beginner, you must know that crypto wallets are used to store cryptocurrencies which act as digital walls having particular hash key functions which only the owner has access to.
This key determines who has access to the funds, and this way, the whole assembly remains super secure, and a hacker or cybercriminal could never dare even go near it because of the immense, decentralized security.
For the owner to get into their own crypto wallet, the hash key function that they are carrying on them needs to be validated not by one but by an entire network of node validators working for that specific blockchain which ensures that the key is legitimate, the owner is legitimate, so yes they should have access to their wallet.
Even if a single node doesn’t budge in and claims that the owner is not who he says he is, then their access to their own wallet will be restricted, but it is an ‘if and then’ approach and doesn’t mean that the node validators are going to make a mistake, it is just a security measure and the best one there is in place.
Introduction to Hierarchical Deterministic Wallet
Today, we shall be talking about a hierarchical deterministic wallet which is a digital wallet that doesn’t store cryptocurrencies per se but the hash key functions for various users who have their cryptocurrencies placed somewhere else.
You could be an owner of Bitcoin or Ether or any other cryptocurrency having them placed in a secretive crypto wallet, but at the same time needing an extra layer of security; therefore, you decide to place the hash function for your original wallet into the hierarchical deterministic wallet, which in turn would produce another hash key for you which could be used to retrieve your original hash key and hence to activate your funds in the original wallet.
It is a bit technical approach, but in the long run, it is much more effective and holds a more pivotal ground to enhance the overall security profile of your crypto wallet.
With that being said, anyone who has a copy of both the password like the private key and the public hash function key would be able to control any and all crypto matter present within the account.
In a pursuit to prevent hacking or cyber-criminal-oriented attacks, all the hash keys generated by the Hierarchical Deterministic wallet are random in nature; not only this, but these keys are also backed up within the same wallet to avoid any kind of confusion or giving way to criminal activity.
A single random seed is able to develop a series of hash function key pairs which allows users to have some sigh of relief and convenience while at the same time being able to manage all of these security-related aspects and concerns of the hierarchical deterministic wallet.
How Does Hierarchical Deterministic Wallet Work?
To be able to understand the working of a hierarchical deterministic wallet, it is essential that you understand how a conventional crypto wallet actually works for you. In the essence of the crypto world, all crypto wallets out there generally have keys in them instead of tokens or coins. Two random keys are generated by a single crypto wallet; these are known as public keys, which are kind of an account number, if you will, for your crypto wallet and a private key which is the login information to that specific account.
It should be provided to the holder of the wallet, which is used on occasions by the user to transfer funds to and from the said wallet. This key acts as a password for that specific wallet, and each time a request to either debit or credit crypto from the wallet is initiated both these times the user or owner of the wallet must authorize the transaction using their own private key. This combination of both the public and private keys is placed right there to ensure that hackers are not able to take advantage of the system and to lend a factor of anonymity to the said user.
The private key is of much more significance here than the public key because the public key is evidently shared with the rest of the public, but single-handedly it has no significance, such as giving control of the wallet to some random user because the private key is needed to do that. Hence it is much more important to make sure that this practice remains as secure as possible both these keys are generated pretty randomly without any proper code or system in place.
To make sure that both keys remain secure and always in possession of the owner, mostly private, and the public key is indeed secured within the wallet itself.
But to make sure that all the transactions that are being orchestrated from the crypto wallet for whatever cryptocurrency remains secure, these keys are generated randomly for each and every transaction; it is a known fact that the private key might remain the same, whereas the public key might change itself over time as an OTP that is received by the conventional banking user each time they want to authenticate a particular transaction.
That is why over time, it might get difficult for the crypto wallet user to manage this element on their own, and that is where hierarchical deterministic wallets come into the equation.
These were created as a form of solution to this specific problem in which each and every key, whether it is a public or private key, could be traced all the way back to the original genesis seed, which is random in nature, having a set of random words and a hash function for that specific wallet.
With the help of a hierarchical deterministic wallet, you can recover the original seed from which all these keys were generated in a random fashion which is why you only require a single backup for the genesis seed at the time of creating the hierarchical deterministic wallet.
You don’t have to deal with the mess of always looking back at the plethora of keys that were used for the sake of authenticating the transactions because you have got each and every key right then and there in the form of the genesis seed for that specific crypto wallet.
Difference Between Deterministic and Hierarchical Deterministic Wallets
It goes without saying that hierarchical deterministic wallets are some of the most advanced types of the deterministic wallets; they have the keys, both private and public, embedded in a tree-like structure; their parent’s keys are able to produce children’s keys that can produce grandchildren’s keys and so on so just like a family tree of a random person in the world which links that said person to its parents their grandparents and towards it, ancestors and at the same time links that very person to its children, grandchildren and to the rest of the progeny.
That tree structure can be used by the crypto holder for the sake of organizing all of their transactions by specific categories, such as the type of transaction or the type of entity that was involved in the said transaction and other departments or subsidiaries thrown into the mix.
The hierarchical deterministic wallets, on the other hand, are just like deterministic wallets as these are created from a single root seed which happens to be the genesis seed from which all other keys are generated, and that is represented by a mnemonic word sequence which ultimately makes it quite efficient and convenient for the account holder to trust this method and to store it either in their own mind or in any potential way they see fit.
But on top of that, a hierarchical deterministic wallet also presents the user with an option of developing public keys without linking them to the corresponding private keys; this means that these public keys would be used by the user on servers that are not secure or if the user only wants to have some crypto credited into their crypto wallet for a receive-only mode.
Benefits of Hierarchical Deterministic Wallet
The enchanted benefit of progressing with this approach is that you won’t have to deal with overzealous OTP requests in the form of public keys, which need to be developed every time as a pair with the private keys for the sake of authenticating a transaction even if it was only to receive funds in your wallet or for some other activity which you would rather remain anonymous rather than written all over the online activity of the crypto wallet that you are using in terms of developing random private and public keys.
This way, you can at least remain anonymous on the internet and not engage in any scrupulous activity which involves the wallet authenticating your identity every time a transaction request needs to be entertained.
You would only be bothered with the development of a private and public key as a pair when you either have to send some crypto away from your wallet, such as in debit mode or conduct a verified sale over the internet, which would ultimately require you to authenticate your transaction by punching in your private and public keys created by the very wallet that you’re using at the moment.
This is the most significant benefit of the hierarchical deterministic crypto wallet over every other wallet that you are using at the moment.
Many people are almost worn out with the element of developing a new address each time they have to conduct a crypto transaction, as it takes away most of their focus and energy to do just that, creating a new address for the transaction to go through.
It is simple mathematics in the blockchain world where if you have used a dedicated address to conduct a transaction for Bitcoin or any other cryptocurrency for that matter, then that address is termed as ‘spent’ which means that you can’t conduct any more transactions whether it is debit or credit in nature using the same address over and over again.
For a new transaction, a new address needs to be developed from scratch, and that address would be now used to either receive funds or send them from your wallet.
These addresses are the public keys; these are linked together in the form of particular nodes connecting each and every public key that has been used in the previous transactions.
This means that you still have control over those public keys, and you have not lost these entirely, but those keys, unfortunately, can’t be used for a new transaction because these are already committed to the previous transactions that you have made with your crypto wallet.
What a hierarchical deterministic wallet does here is that it generates a master private, public key that would remain in your ownership and also within the wallet for which these keys were created in the first place. This is to make sure that you don’t lose these keys in the coming years, and these always remain near to you whenever you want to use them.
These keys don’t require you to generate new random keys each time you want to authenticate a transaction; this is by far the most elementary property of a hierarchical deterministic wallet that no other crypto wallet out there is providing.
Due to this very reason, the hierarchical deterministic wallet has enjoyed an influx of customers changing their previous crypto wallets to the hierarchical deterministic wallet and for the very requirement of not having to generate both public and private keys as a pair whenever they are to engage in a particular transaction because the HD wallet does it for them automatically.
This allows you to have a much more elegant sense of privacy than you have had before with your old crypto wallet.
This approach allows for the generation of multiple addresses under the same master public and the private key entity, which means that you would not have to deal with the mass of developing more and more keys for each and every transaction and people who are sending new crypto to that specific address would be redirected through multiple addresses thus having no clue of the main address whatsoever.
This means that they won’t be able to know how much Bitcoin you own presently, how many transactions you have performed, or any other pivotal information that could lead to you either directly or indirectly.
Not only this, but you will be able to enjoy an increased sense of security with the help of the HD wallet; as mentioned earlier, anyone who has access to the private key would eventually have access to all the funds present within the wallet itself, and because you have diversified and generated your funds over multiple addresses, therefore, people who are trying to gain control of your wallet would require multiple private keys from all of these addresses to be able to access your crypto wallet.
Whereas on the other hand, you would only require a master private and public key configuration to access your own funds, thus lending you an extra sense of security detail that is not present anywhere else.