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@ -20,9 +20,9 @@ In this chapter we will look at the second meaning, where wallets are containers
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 of", "wallet types")))There are two primary types of wallets, distinguished by whether the keys they contain are related to each other or not.
((("wallets", "types of", "primary distinctions")))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."
((("JBOK wallets", seealso="wallets")))((("wallets", "types of", "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."
((("deterministic wallets", seealso="wallets")))The second type of wallet is a _deterministic wallet_, where all the keys are derived from a single master key, known as the _seed_. All the keys in this type of wallet are related to each other and can be generated again if one has the original seed. ((("key derivation methods")))There are a number of different _key derivation_ methods used in deterministic wallets. ((("hierarchical deterministic (HD) wallets", seealso="wallets")))The most commonly used derivation method uses a tree-like structure and is known as a _hierarchical deterministic_ or _HD_ wallet.
@ -33,7 +33,7 @@ The next few sections introduce each of these technologies at a high level.
[[random_wallet]]
==== Nondeterministic (Random) Wallets
((("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.
((("wallets", "types 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 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.
((("wallets", "types 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 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>>.
((("wallets", "types 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
@ -106,9 +106,9 @@ If you are implementing a bitcoin wallet, it should be built as a hierarchical d
==== Using a Bitcoin Wallet
((("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.
((("wallets", "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.
((("Trezor bitcoin hardware wallet", seealso="wallets")))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.
[[a_trezor_device]]
.A Trezor device: a bitcoin HD wallet in hardware
@ -155,7 +155,7 @@ For the first implementation of his web store, Gabriel uses a single bitcoin add
((("brainwallets")))Mnemonic words are often confused with "brainwallets." They are not the same. The primary difference is that a brainwallet consists of words chosen by the user, whereas mnemonic words are created randomly by the wallet and presented to the user. This important difference makes mnemonic words much more secure, because humans are very poor sources of randomness.
====
Mnemonic codes are defined in Bitcoin Improvement Proposal 39 (see <<appdxbitcoinimpproposals>>). Note that BIP-39 is one implementation of a mnemonic code standard. ((("Electrum wallet")))Specifically, there is a different standard, with a different set of words, used by the Electrum wallet and predating BIP-39. BIP-39 was proposed by the company behind the Trezor hardware wallet and is incompatible with Electrum's implementation. However, BIP-39 has now achieved broad industry support across dozens of interoperable implementations and should be considered the de-facto industry standard.
Mnemonic codes are defined in Bitcoin Improvement Proposal 39 (see <<appdxbitcoinimpproposals>>). Note that BIP-39 is one implementation of a mnemonic code standard. ((("Electrum wallet", seealso="wallets")))Specifically, there is a different standard, with a different set of words, used by the Electrum wallet and predating BIP-39. BIP-39 was proposed by the company behind the Trezor hardware wallet and is incompatible with Electrum's implementation. However, BIP-39 has now achieved broad industry support across dozens of interoperable implementations and should be considered the de-facto industry standard.
BIP-39 defines the creation of a mnemonic code and seed, which we describe here in nine steps. For clarity, the process is split in two parts: steps 1 through 6 are shown in <<generating_mnemonic_words>> and steps 7 through 9 are shown in <<mnemonic_to_seed>>.