This public/private combination mechanism ensures safety of the cryptocurrency tokens, but comes with an additional overhead of the user being required to repeatedly generate a random pair of private/public addresses (or keys), and back up each time one configures a new pair of addresses. As the number of transactions increases, this process becomes cumbersome for the user.
HD Wallets, or Hierarchical Deterministic wallets, solve this problem by deriving all the addresses from a single master seed (hence the name hierarchical)
A deterministic wallet is a system of deriving keys from a single starting point known as a seed. The seed allows a user to easily back up and restore a wallet without needing any other information and can in some cases allow the creation of public addresses without the knowledge of the private key. Seeds are typically serialized into human-readable words in a Mnemonic phrase.
A mnemonic phrase, mnemonic recovery phrase or mnemonic seed is a list of words which store all the information needed to recover a smartcash wallet. Wallet software will typically generate a mnemonic backup phrase and instruct the user to write it down on paper. If the user's computer breaks or their hard drive becomes corrupted, they can download the same wallet software again and use the paper backup to get their smartcash back.
Anybody else who discovers the phrase can steal the smartcash, so it must be kept safe like jewels or cash. For example, it must not be typed into any website.
Mnemonic phrases are an excellent way of backing up and storing smartcash and so they are used by almost all well-regarded wallets
An example of a mnemonic phrase is:
witch practice despair feed shame open creek road ice least collapse again
The word order is important.
Deterministic wallets can generate an unlimited number of addresses on the fly and as such don't suffer from this issue. As the addresses are generated in a known fashion rather than randomly some clients can be used on multiple devices without the risk of losing funds. Users can conveniently create a single backup of the seed in a human readable format that will last the life of the wallet, without the worry of this backup becoming stale.
HD wallets were developed under the BIP 32
HD is an abbreviation for Hierarchical Deterministic. All HD wallets use 12-word master seed keys. Each time this seed is appended by a counter at the end and is used to derive seemingly unlimited new SmartCash addresses hierarchically and sequentially.
Since all the address are derived from a single master seed, you only need to worry about backing it up. That’s why it is called Hierarchical Deterministic.
Advantages of HD Wallets
- You need to backup only one key (i.e. “seed key”). It is the only backup you will ever need.
- You can generate many receiving addresses every time you receive SmartCash.
- You can protect your financial privacy.
- Confuse new users, as your receiving address changes every time.
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