The term Deterministic Wallet refers to a system in which all the addresses of the wallet are generated from a single initial seed.
This contrasts with wallets that generate cryptographic keys on a random basis.
Deterministic Wallets provide several benefits.
Chief among them is the ability to backup and restore the entire wallet using just the seed phrase. Moreover, by generating a new address for every transaction, they enhance privacy and security.
Today, many prefer deterministic wallets due to the following advantages:
Simplified Backups: With a single seed, you can recover all your addresses and transactions. No need to backup every new address you create.
Enhanced Privacy: Every new transaction gets a new address, making it harder to link transactions to a single user.
Efficient Organization: Helps in keeping your financial records organized, as you can generate and label addresses for specific purposes.
Deterministic Wallets can be broadly categorized into two:
Simple Deterministic Wallets (SDW): They use a single private key to generate all subsequent keys. Though simpler, they offer lesser flexibility compared to their hierarchical counterparts.
Hierarchical Deterministic Wallets (HDW): These allow for more organizational structure, like creating a new subtree for every user or purpose, making them more suitable for businesses or advanced users.
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