A Hierarchical Deterministic (HD) Wallet is a kind of digital wallet used in the blockchain and cryptocurrency world. The “hierarchical deterministic” part refers to the way in which the wallet is able to generate new addresses.
Here are the main characteristics of HD Wallets:
- Deterministic: This means that they generate new addresses using a specific method that is repeatable. This means that instead of randomly generating new addresses for each transaction (which would require backing up the wallet frequently), the same list of addresses can be regenerated from a specific seed.
- Hierarchical: This feature allows the wallet to create “child” addresses from “parent” addresses. This hierarchical structure can be useful for organizational purposes. For instance, you can have a top-level address for savings, and then create child addresses for different savings goals.
The specification for HD wallets is described in BIP 32 (Bitcoin Improvement Proposal 32).
The main benefit of using an HD Wallet is that it allows for secure in-app backups. Since all the addresses can be regenerated from the initial seed, you can recover all of your funds even if you lose your device. This seed usually comes in the form of 12 or 24 words, which needs to be kept in a secure place. As long as you have this seed, you can restore your wallet and all its associated addresses and funds.
Another benefit is the ability to generate a new address for each transaction, which is a practice that can enhance privacy. Because all the addresses are deterministically linked to the seed, they can all be recovered even though they are different from each other.