Organizational Advantages And Disadvantages Of HD Wallets

We are continuing our series with educational blog posts about non-custodial wallets which play an essential part of our comprehensive blockchain infrastructure suite. In previous posts, we discussed what HD wallets are, how they address the issues which arise with single-key wallets, and what is the HD wallet structure by exploring each of its tree-level branches (from master node to child address generation) along with different organizational use cases.  

As with all types of wallets, the HD wallets have their own strengths and weaknesses, and carry certain advantages and disadvantages to their users. By the time you finish reading this post, you should be able to understand and have the ability to decide if Crypto API`s HD wallets are suitable for your needs, but even if you are unsure, our specialists can answer all of your questions to help you make the right choice.

HD Wallets Advantages 

From an organizational point of view, the advantages of the HD wallets are much more than their disadvantages. We have tried to put together a comprehensive list with all key advantages. Please keep in mind that despite the fact that we invested extra time crafting this post, the list with pros and cons may include additional aspects which were excluded and were beyond the focus of this post, but we acknowledge their presence.   

Deriving Unlimited Wallet Addresses & Blockchain Interoperability 

HD wallets enable the creation of as many addresses as needed, all of which are running under a single wallet. The child addresses can be part of all wallet chains that are available inside the wallet, for example if you have assets that are running on three different testnets for a specific blockchain and its mainnet network, unlimited child addresses can be generated under all 4 wallet chains. 

Another key advantage of non-custodial wallets is their interoperability and compatibility. HD wallets support numerous blockchain protocols along with all available blockchain layers that relate to the protocols. In addition, all digital assets (coins & tokens; non-fungibe and fungible assets) which run on the corresponding blockchain networks along with all underlying token standards can be stored in HD wallets. 

Security & Privacy

HD wallets provide extra security and protection through the master seed (this is the 12, 18 or 24 word mnemonic phrase) from which all the wallet`s addresses and private keys are derived. This undoubtedly saves time and removes the need to back up each individual private key. However, this can be also seen as a disadvantage, but we`ll discuss this limitation in the disadvantages section below. 

Another advantage is that HD wallets can be restored on different devices and wallet applications, unlike other types of wallets. The only condition is they must support the BIP-39 (an upgraded version of BIP-32) and BIP-44 standards.

To protect your privacy, you can make transactions separate from each other by using different addresses, or, for example, generating new addresses for a specific transaction/purpose. At the same time you get the convenience of keeping records on all address transactions into a single wallet. 

Costs reductions

HD wallets are very cost-efficient in a sense the way they are constructed is allowing indirect savings to be made from transactions. We have a separate post which provides insights on how HD wallets can help you reduce your costs. To avoid repetition, we will just summarise the key information - address reuse prevention which drastically reduces the chances of potential attacks (leading to financial losses); fees optimization letting you choose what fee you would like to pay for better cost optimization; HD wallets operate as self-custody removing the need to pay to an intermediary for management; and last but not least - we need to take into consideration network conditions (i.e. congestions) as well as the human factor.  

Accounting, Licensing and Audits

When it comes to the most popular use cases of HD wallets among organizations, the utilization of these wallets is very often driven by their easiness to bookkeep all transactions in one place. Users can easily view all address balances along with all inflow and outflow funds. The best part is that no licences are needed and you can perform a full audit of your wallet without possessing a custody licence, which otherwise would be “a must have”.  

Single point of ownership

Whoever possesses the private keys owns the wallet. This can provide additional peace of mind to organizations that are worried of how internal management of funds is being executed and whether everything is transparent and honest. Through the single point of ownership potential dishonest and abusive activities from other parties is completely eliminated.

However, similar to what we mentioned in the security and privacy section, this can also be a disadvantage.

HD Wallets Disadvantages

Despite the insignificant number of disadvantages when compared to the number of advantages the HD wallets have, there are several limitations that organizations need to be aware of. 

In terms of security, privacy and ownership, the fact that only one master key provides access to all addresses has its own limitations, as we mentioned above. In an event of losing your key there is a risk that someone can get access to your HD wallet and this can result in potential losses from all addresses associated with the wallet. This is why we strongly encourage you to keep your private key safe from everyone else but you - this will let you mitigate the risks, or keep them down to a minimum. 

You also need input from developers as they need to be able to implement code to let you operate and transact funds with your HD wallet. Setting it up is more complex than setting up a single-key wallet address. The good news is that it is not a cumbersome activity, but it still requires the attention of your technical team. Our technical documentation section can help you get up to speed in no time, with detailed explanations on all aspects of how to properly set up your HD wallet.

In conclusion, HD wallets are very popular cryptocurrency wallets with a range of use cases that match many of the corporate requirements. Тhanks to Crypto APIs non-custodial solutions, users can enjoy a secure and very convenient way for managing and storing assets. Our HD wallets continue to gain popularity across organizations, not only because of their privacy and security features, but also because of HD wallets interoperability and ability to generate as many addresses as a client desires. This is what makes HD wallets stand out from other cryptocurrency wallets available on the market.