Deterministic wallets were developed to make it easy to derive many keys from a single seed. Currently, the most advanced form of deterministic wallets is the hierarchical deterministic (HD) wallet defined by Bitcoin’s BIP-32 standard. HD wallets contain keys derived in a tree structure, such that a parent key can derive a sequence of child keys, each of which can derive a sequence of grandchild keys, and so on. This tree structure is illustrated in HD wallet: a tree of keys generated from a single seed.
Figure 1. HD wallet: a tree of keys generated from a single seed
HD wallets offer several advantages over simpler deterministic wallets:
First, the tree structure can be used to express additional organizational meaning, such as when a specific branch of subkeys is used to receive incoming payments and a different branch is used to receive change from outgoing payments. Branches of keys can also be used in corporate settings, allocating different branches to departments, subsidiaries, specific functions, or accounting categories.
The second advantage of HD wallets is that users can create a sequence of public keys without having access to the corresponding private keys. This allows HD wallets to be used on an insecure server or in a watch-only or receive-only capacity, where the wallet doesn’t have the private keys that can spend the funds.
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