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[[ch05_wallets]]
== Wallets
((("bitcoin", "wallets", id="Bwallets05")))((("wallets", "defined")))The word "wallet" is used to describe a few different things in bitcoin.
((("wallets", "defined")))The word "wallet" is used to describe a few different things in bitcoin.
At a high-level, a wallet is an application that serves as the primary user interface. The wallet controls access to a user's money, managing keys and addresses, tracking the balance, and creating and signing transactions.
@ -11,16 +11,16 @@ In this chapter we will look at the second meaning, where wallets are containers
=== Wallet Technology Overview
((("wallets", "technology overview", id="Wtechnology05")))In this section we summarize the various technologies used to construct user-friendly, secure, and flexible bitcoin wallets.
((("wallets", "technology of", id="Wtechnology05")))In this section we summarize the various technologies used to construct user-friendly, secure, and flexible bitcoin wallets.
((("wallets", "technology overview", "wallet contents")))A common misconception about bitcoin is that bitcoin wallets contain bitcoin. In fact, the wallet contains only keys. The "coins" are recorded in the blockchain on the bitcoin network. Users control the coins on the network by signing transactions with the keys in their wallets. ((("keychains")))In a sense, a bitcoin wallet is a _keychain_.
((("wallets", "technology of", "wallet contents")))A common misconception about bitcoin is that bitcoin wallets contain bitcoin. In fact, the wallet contains only keys. The "coins" are recorded in the blockchain on the bitcoin network. Users control the coins on the network by signing transactions with the keys in their wallets. ((("keychains")))In a sense, a bitcoin wallet is a _keychain_.
[TIP]
====
Bitcoin wallets contain keys, not coins. Each user has a wallet containing keys. Wallets are really keychains containing pairs of private/public keys (see <<private_public_keys>>). Users sign transactions with the keys, thereby proving they own the transaction outputs (their coins). The coins are stored on the blockchain in the form of transaction-outputs (often noted as vout or txout).
====
((("wallets", "technology overview", "wallet types")))There are two primary types of wallets, distinguished by whether the keys they contain are related to each other or not.
((("wallets", "technology of", "wallet types")))There are two primary types of wallets, distinguished by whether the keys they contain are related to each other or not.
((("JBOK wallets")))((("wallets", "JBOK wallets")))((("nondeterministic wallets", seealso="wallets")))The first type is _nondeterministic wallets_, where each key is independently generated from a random number. The keys are not related to each other. This type of wallet is also known as a JBOK wallet from the phrase "Just a Bunch Of Keys."
@ -33,7 +33,7 @@ The next few sections introduce each of these technologies at a high level.
[[random_wallet]]
==== Nondeterministic (Random) Wallets
((("wallets", "technology overview", "nondeterministic (random) wallets")))In the first bitcoin wallet (now called Bitcoin Core), wallets were collections of randomly generated private keys. For example, the original Bitcoin Core client pregenerates 100 random private keys when first started and generates more keys as needed, using each key only once. Such wallets are being replaced with deterministic wallets because they are cumbersome to manage, back up, and import. The disadvantage of random keys is that if you generate many of them you must keep copies of all of them, meaning that the wallet must be backed up frequently. Each key must be backed up, or the funds it controls are irrevocably lost if the wallet becomes inaccessible. This conflicts directly with the principle of avoiding address re-use, by using each bitcoin address for only one transaction. Address re-use reduces privacy by associating multiple transactions and addresses with each other. A Type-0 nondeterministic wallet is a poor choice of wallet, especially if you want to avoid address re-use because that means managing many keys, which creates the need for frequent backups. Although the Bitcoin Core client includes a Type-0 wallet, using this wallet is discouraged by developers of Bitcoin Core. <<Type0_wallet>> shows a nondeterministic wallet, containing a loose collection of random keys.
((("wallets", "technology of", "nondeterministic (random) wallets")))In the first bitcoin wallet (now called Bitcoin Core), wallets were collections of randomly generated private keys. For example, the original Bitcoin Core client pregenerates 100 random private keys when first started and generates more keys as needed, using each key only once. Such wallets are being replaced with deterministic wallets because they are cumbersome to manage, back up, and import. The disadvantage of random keys is that if you generate many of them you must keep copies of all of them, meaning that the wallet must be backed up frequently. Each key must be backed up, or the funds it controls are irrevocably lost if the wallet becomes inaccessible. This conflicts directly with the principle of avoiding address re-use, by using each bitcoin address for only one transaction. Address re-use reduces privacy by associating multiple transactions and addresses with each other. A Type-0 nondeterministic wallet is a poor choice of wallet, especially if you want to avoid address re-use because that means managing many keys, which creates the need for frequent backups. Although the Bitcoin Core client includes a Type-0 wallet, using this wallet is discouraged by developers of Bitcoin Core. <<Type0_wallet>> shows a nondeterministic wallet, containing a loose collection of random keys.
[TIP]
====
@ -46,7 +46,7 @@ image::images/mbc2_0501.png["Non-Deterministic Wallet"]
==== Deterministic (Seeded) Wallets
((("wallets", "technology overview", "deterministic (seeded) wallets")))Deterministic, or "seeded" wallets are wallets that contain private keys that are all derived from a common seed, through the use of a one-way hash function. The seed is a randomly generated number that is combined with other data, such as an index number or "chain code" (see <<hd_wallets>>) to derive the private keys. In a deterministic wallet, the seed is sufficient to recover all the derived keys, and therefore a single backup at creation time is sufficient. The seed is also sufficient for a wallet export or import, allowing for easy migration of all the user's keys between different wallet implementations. <<Type1_wallet>> shows a logical diagram of a deterministic wallet.
((("wallets", "technology of", "deterministic (seeded) wallets")))Deterministic, or "seeded" wallets are wallets that contain private keys that are all derived from a common seed, through the use of a one-way hash function. The seed is a randomly generated number that is combined with other data, such as an index number or "chain code" (see <<hd_wallets>>) to derive the private keys. In a deterministic wallet, the seed is sufficient to recover all the derived keys, and therefore a single backup at creation time is sufficient. The seed is also sufficient for a wallet export or import, allowing for easy migration of all the user's keys between different wallet implementations. <<Type1_wallet>> shows a logical diagram of a deterministic wallet.
[[Type1_wallet]]
.Type-1 deterministic (seeded) wallet: a deterministic sequence of keys derived from a seed
@ -55,7 +55,7 @@ image::images/mbc2_0502.png["Deterministic Wallet"]
[[hd_wallets]]
==== Hierarchical Deterministic Wallets (BIP-32/BIP-44)
((("wallets", "technology overview", "hierarchical deterministic (HD) wallets")))((("hierarchical deterministic (HD) wallets")))((("bitcoin improvement proposals", "Hierarchical Deterministic Wallets (BIP-32/BIP-44)")))Deterministic wallets were developed to make it easy to derive many keys from a single "seed." The most advanced form of deterministic wallets is the _hierarchical deterministic wallet_ or _HD wallet_ defined by the BIP-32 standard. Hierarchical deterministic wallets contain keys derived in a tree structure, such that a parent key can derive a sequence of children keys, each of which can derive a sequence of grandchildren keys, and so on, to an infinite depth. This tree structure is illustrated in <<Type2_wallet>>.
((("wallets", "technology of", "hierarchical deterministic (HD) wallets")))((("hierarchical deterministic (HD) wallets")))((("bitcoin improvement proposals", "Hierarchical Deterministic Wallets (BIP-32/BIP-44)")))Deterministic wallets were developed to make it easy to derive many keys from a single "seed." The most advanced form of deterministic wallets is the _hierarchical deterministic wallet_ or _HD wallet_ defined by the BIP-32 standard. Hierarchical deterministic wallets contain keys derived in a tree structure, such that a parent key can derive a sequence of children keys, each of which can derive a sequence of grandchildren keys, and so on, to an infinite depth. This tree structure is illustrated in <<Type2_wallet>>.
[[Type2_wallet]]
.Type-2 hierarchical deterministic wallet: a tree of keys generated from a single seed
@ -67,7 +67,7 @@ The second advantage of HD wallets is that users can create a sequence of public
==== Seeds and Mnemonic Codes (BIP-39)
((("wallets", "technology overview", "seeds and mnemonic codes")))((("mnemonic code words")))((("bitcoin improvement proposals", "Mnemonic Code Words (BIP-39)")))Hierarchical deterministic wallets are a very powerful mechanism for managing many keys and addresses. They are even more useful if they are combined with a standardized way of creating seeds from a sequence of English words that are easy to transcribe, export, and import across wallets. This is known as a _mnemonic_ and the standard is defined by BIP-39. Today, most bitcoin wallets (as well as wallets for other cryptocurrencies) use this standard and can import and export seeds for backup and recovery using interoperable mnemonics.
((("wallets", "technology of", "seeds and mnemonic codes")))((("mnemonic code words")))((("bitcoin improvement proposals", "Mnemonic Code Words (BIP-39)")))Hierarchical deterministic wallets are a very powerful mechanism for managing many keys and addresses. They are even more useful if they are combined with a standardized way of creating seeds from a sequence of English words that are easy to transcribe, export, and import across wallets. This is known as a _mnemonic_ and the standard is defined by BIP-39. Today, most bitcoin wallets (as well as wallets for other cryptocurrencies) use this standard and can import and export seeds for backup and recovery using interoperable mnemonics.
Let's look at this from a practical perspective. Which of the following seeds is easier to transcribe, record on paper, read without error, export, and import into another wallet?
@ -106,7 +106,7 @@ If you are implementing a bitcoin wallet, it should be built as a hierarchical d
==== Using a Bitcoin Wallet
((("wallets", "technology overview", "using bitcoin wallets")))In <<user-stories>> we introduced Gabriel, an enterprising young teenager in Rio de Janeiro, who is running a simple web store that sells bitcoin-branded t-shirts, coffee mugs, and stickers.
((("wallets", "technology of", "using bitcoin wallets")))In <<user-stories>> we introduced Gabriel, an enterprising young teenager in Rio de Janeiro, who is running a simple web store that sells bitcoin-branded t-shirts, coffee mugs, and stickers.
((("Trezor bitcoin hardware wallet")))Gabriel uses a Trezor bitcoin hardware wallet (<<a_trezor_device>>), to securely manage his bitcoin. The Trezor is a simple USB device with two buttons that stores keys (in the form of an HD wallet) and signs transactions. Trezor wallets implement all the industry standards discussed in this chapter, so Gabriel is not reliant on any proprietary technology or single vendor solution.
@ -143,12 +143,12 @@ For the first implementation of his web store, Gabriel uses a single bitcoin add
=== Wallet Technology Details
((("wallets", "technology details", id="Wdetails05")))Let's now examine each of the important industry standards that are used by many bitcoin wallets, in detail.
((("wallets", "technology of", id="Wdetails05")))Let's now examine each of the important industry standards that are used by many bitcoin wallets, in detail.
[[mnemonic_code_words]]
==== Mnemonic Code Words (BIP-39)
((("wallets", "technology details", "mnemonic code words")))((("mnemonic code words", id="mnemonic05")))((("bitcoin improvement proposals", "Mnemonic Code Words (BIP-39)", id="BIP3905")))Mnemonic code words are word sequences that represent (encode) a random number used as a seed to derive a deterministic wallet. The sequence of words is sufficient to re-create the seed and from there re-create the wallet and all the derived keys. A wallet application that implements deterministic wallets with mnemonic words will show the user a sequence of 12 to 24 words when first creating a wallet. That sequence of words is the wallet backup and can be used to recover and re-create all the keys in the same or any compatible wallet application. Mnemonic words make it easier for users to back up wallets because they are easy to read and correctly transcribe, as compared to a random sequence of numbers.
((("wallets", "technology of", "mnemonic code words")))((("mnemonic code words", id="mnemonic05")))((("bitcoin improvement proposals", "Mnemonic Code Words (BIP-39)", id="BIP3905")))Mnemonic code words are word sequences that represent (encode) a random number used as a seed to derive a deterministic wallet. The sequence of words is sufficient to re-create the seed and from there re-create the wallet and all the derived keys. A wallet application that implements deterministic wallets with mnemonic words will show the user a sequence of 12 to 24 words when first creating a wallet. That sequence of words is the wallet backup and can be used to recover and re-create all the keys in the same or any compatible wallet application. Mnemonic words make it easier for users to back up wallets because they are easy to read and correctly transcribe, as compared to a random sequence of numbers.
[TIP]
====
@ -303,7 +303,7 @@ https://dcpos.github.io/bip39/[].
==== Creating an HD Wallet from the Seed
((("wallets", "technology details", "creating HD wallets from root seed")))((("root seeds")))((("hierarchical deterministic (HD) wallets")))HD wallets are created from a single _root seed_, which is a 128-, 256-, or 512-bit random number. Most commonly, this seed is generated from a _mnemonic_ as detailed in the previous section.
((("wallets", "technology of", "creating HD wallets from root seed")))((("root seeds")))((("hierarchical deterministic (HD) wallets")))HD wallets are created from a single _root seed_, which is a 128-, 256-, or 512-bit random number. Most commonly, this seed is generated from a _mnemonic_ as detailed in the previous section.
Every key in the HD wallet is deterministically derived from this root seed, which makes it possible to re-create the entire HD wallet from that seed in any compatible HD wallet. This makes it easy to back up, restore, export, and import HD wallets containing thousands or even millions of keys by simply transferring only the mnemonic that the root seed is derived from.
@ -400,7 +400,7 @@ image::images/mbc2_0511.png["ChildPublicDerivation"]
==== Using an Extended Public Key on a Web Store
((("wallets", "technology details", "using extended public keys on web stores")))Let's see how HD wallets are used by continuing our story with Gabriel's web store.
((("wallets", "technology of", "using extended public keys on web stores")))Let's see how HD wallets are used by continuing our story with Gabriel's web store.
Gabriel first set up his web store as a hobby, based on a simple hosted Wordpress page. His store was quite basic with only a few pages and an order form with a single bitcoin address.
@ -476,7 +476,7 @@ The first-level "purpose" is always set to +44'+. The second-level "coin_type" s
The third level of the tree is "account," which allows users to subdivide their wallets into separate logical subaccounts, for accounting or organizational purposes. For example, an HD wallet might contain two bitcoin "accounts": m/44++&#x27;++/0++&#x27;++/0++&#x27;++ and m/44++&#x27;++/0++&#x27;++/1++&#x27;++. Each account is the root of its own subtree.
((("keys and addresses", see="also public and private keys")))On the fourth level, "change," an HD wallet has two subtrees, one for creating receiving addresses and one for creating change addresses. Note that whereas the previous levels used hardened derivation, this level uses normal derivation. This is to allow this level of the tree to export extended public keys for use in a nonsecured environment. Usable addresses are derived by the HD wallet as children of the fourth level, making the fifth level of the tree the "address_index." For example, the third receiving address for bitcoin payments in the primary account would be M/44++&#x27;++/0++&#x27;++/0++&#x27;++/0/2. <<table_4-9>> shows a few more examples.((("", startref="Bwallets05")))((("", startref="Wdetails05")))
((("keys and addresses", see="also public and private keys")))On the fourth level, "change," an HD wallet has two subtrees, one for creating receiving addresses and one for creating change addresses. Note that whereas the previous levels used hardened derivation, this level uses normal derivation. This is to allow this level of the tree to export extended public keys for use in a nonsecured environment. Usable addresses are derived by the HD wallet as children of the fourth level, making the fifth level of the tree the "address_index." For example, the third receiving address for bitcoin payments in the primary account would be M/44++&#x27;++/0++&#x27;++/0++&#x27;++/0/2. <<table_4-9>> shows a few more examples.((("", startref="Wdetails05")))
[[table_4-9]]
.BIP-44 HD wallet structure examples