05 Feb Bitcoin: How does a HD wallet work in practice?
Understanding Hashed Digital Keys: How HD Wallets Work
As cryptocurrencies like Bitcoin continue to gain popularity, understanding how they work behind the scenes can be fascinating. In this article, we’ll delve into the world of hashed digital keys and how Hardware-Denied (HD) wallets operate.
What is an HD Wallet?
A Hardware-Denied (HD) wallet is a type of cryptocurrency wallet that uses a master private key to store the funds. Unlike Software-Denied wallets, which require software to manage transactions, an HD wallet stores all the necessary keys on a physical device – typically a computer or a specialized hardware wallet.
How Do HD Wallets Work?
An HD wallet consists of three main components:
- Master Private Key (MPK)
: This is the private key that unlocks the funds in your wallet.
- Seed Phrase: Also known as a MAST, it’s a long string of words used to generate multiple child/ grandchild keys.
- Child/Grandchild Keys
: These are generated by hashing the Seed Phrase using the MPK and other parameters.
How HD Wallets Derive Child/Grandchild Keys
To derive child/grandchild keys from a master private key, an HD wallet uses the following process:
- Take the master private key (MPK) and encrypt it with a password or passphrase.
- Use this encrypted MPK to generate a random seed using a hash function (e.g., SHA-256).
- The seed is used to create a new private key, which is then stored in the wallet.
- This private key is then used to derive multiple child/grandchild keys by hashing the Seed Phrase with additional parameters.
Example of Child/Grandchild Key Derivation
Let’s say we have an HD wallet that uses the following parameters:
- MPK (master private key): 0x1234567890abcdef
- Seed Phrase: 0x0123456789abcdef0
- Hash Function: SHA-256
We would use these parameters to derive child/grandchild keys as follows:
- Derive the first child/ grandchild key by hashing the Seed Phrase with the MPK and an additional parameter (e.g., a timestamp):
Child Key 1 = MPK + Seed Phrase + Timestamp
- Derive the second child/grandchild key by hashing the first child/ grandchild key with the MPK:
Grandchild Key 2 = Child Key 1 + MPK
Benefits of HD Wallets
HD wallets offer several advantages:
- Security: The physical device storing the keys ensures that there’s no software vulnerability, making it more secure.
- Convenience: With an HD wallet, you don’t need to worry about installing and maintaining software on your computer or mobile device.
- Scalability: An HD wallet can handle multiple transactions without requiring additional software.
Conclusion
In conclusion, Hardware-Denied wallets operate by using a master private key to store funds, and then deriving child/grandchild keys from that MPK using a seed phrase. This process provides enhanced security, convenience, and scalability compared to Software-Denied wallets. If you’re considering switching to an HD wallet or already have one set up, understanding how it works can be enlightening and give you a deeper appreciation for the cryptography behind cryptocurrencies like Bitcoin.
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