This is Tai Zen aka Asian prepper and I’m here with my buddy Leon Fu from Leonfu.com. And in this video, we want to talk about a very powerful, a strategy that the new technology of Bitcoin wallets is coming out with and it’s called a hierarchal deterministic wallet.
Now you guys already know that I’m not going to be the one that explains it. I’m just going to be the guy holding the microphone and Leon Fu is going to be the one that’s going to explain it, but we’re going to go into different details and functionalities and define what is a hierarchal deterministic wallet and Leon Fu and to go through and explain it and I’m going to try to break it down into non-technical terms so all of you guys can understand it.
Leon Fu: The other feature of this app and this is not the only app that does this, but it’s also what’s called an HD wallet, a hierarchical deterministic wallet.
Tai Zen: Now can you speak in English so that everybody understands what that…can you step out of your programming mode and be nontechnical? I try to break it down for the nontechnical people to understand even when you say that… I’ve heard other people say it online, what the hell does that deterministic wallet mean?
Leon Fu: So Deterministic Wallet is different than the Bitcoin Core. Like, let’s take the Bitcoin Core wallet for example. So to create a Bitcoin address, what you do is you generate a 160-bit number, random number and then you derive a public…
Tai Zen: So for the nontechnical people that don’t know what a 160-bit number is.
Leon Fu: Two to the 160th power.
Tai Zen: So does that mean like…
Leon Fu: It’s a huge number.
Tai Zen: It’s like 100 decimal places or a thousand numbers long or…
Leon Fu: So Bitcoin security is based on large numbers, like astronomically large numbers. Remember there is no key in Bitcoin. It’s like keeping your money in an open drawer. Anybody that guesses the right number can go in there and take the money. So how do you make sure the money is secured? The random number is so large…
Tai Zen: That it would take you several hundred years to figure it out.
Leon Fu: Even computers, if you just randomly try to pick numbers you will never get a number that had any money in it. It does not matter even if you use computers to randomly pick numbers. I mean, this is such a large number that even computers with astronomical… you can take supercomputers and it would be impossible in your lifetime to actually find like a number that had any money in it.
So that we don’t get off track too far off track on the Breadwallet, what I would suggest is that you guys are watching this and you want to understand how big and large numbers that the Bitcoin network uses, I would recommend that you guys watch James DeAngelo from the World Bitcoin Network.
And he has a great video that talks about the large-scale numbers that Bitcoin uses and I think it’s like “The beauty of large numbers” or something. So just check one of his videos from back in around October of 2014 and he came out with a video that talks about the large numbers of Bitcoin and you guys can understand that some more.
So let’s go back to HD wallet before we get sidetracked, non-HD wallets such as Bitcoin Core, what they do is they generate a random number as a Bitcoin, like every time you create a new big winter dress, it just generates a random number using the random number generator.
So there’s a problem with that though because for security, for privacy, they suggest you never reuse addresses. When somebody pays you, you can give them a new address. And then you don’t use that address again because remembers everything’s on a public ledger.
People can look up all the transactions that happened on that address. So you should generate new addresses every transaction you have, but then that creates a problem – How do you back up your wallet?
Because every time you use a new number, you have to back up that number. Otherwise, if you lose your wallet, you’ll lose your money. So that’s a problem then as you start using a wallet if you did that, your backups, would get larger and larger and you would always have to regularly backup your wallet every time you did new transactions, you have to make another backup.
Tai Zen: It’s too cumbersome and it’s not user-friendly.
Leon Fu: Yes, exactly. So the HD wallet solves that problem is that you only have to make one backup. So the way HD wallet works are that you have a single number as we call it to seed and then from that seed, you can generate an infinite number of Bitcoin addresses from that seed. So you only need the backup one number and I was showing this to you earlier, that number is 12 words that you write down.
Tai Zen: That’s the passphrase that you have me say when I created my Breadwallet.
Leon Fu: When you created your Breadwallet, just by remembering those 12 words in that order, you can regenerate your wallet. You have an infinite number of Bitcoin addresses and because it means that using that random number, it’s deterministic.
Deterministic means that it’s always going to be like it. Whatever the output is going to be, and it’s going to happen every single time. So that’s what an HD wallet is. It means that you don’t have to make your backup, your wallet file every time you use transactions because all your Bitcoin addresses can be derived from that single 12 words.
Tai Zen: Now, is there a reason why it’s only 12 words? Why not six words or three words?
Leon Fu: Well, it could be. You know, I think 12 words is secured. Too few words and it’s too easy to get hacked. Too long, you’re going to forget. But anyway 12 is…
Tai Zen: It’s ideal for security reasons.
Leon Fu: I think Electrum also has this feature and they let you pick how many words you want, 12 to 16 or how many other words, but…
Tai Zen: Whoever created the Breadwallet, they’ve determined that at 12 words that’s fairly safe and secure.
Leon Fu: They implement something called the BIP. I don’t remember what it was 38 or 30. Anyway, actually this HD wallet is one of the Bitcoin improvement protocols proposals. The BIP. There’s a bunch of them and Breadwallet implements that standard.
Tai Zen: Now for the people listening to this and they’re not familiar with the BIP is each time somebody has a new idea to make the Bitcoin wallet better, they can submit a BIP which stands for a Bitcoin Improvement Proposal.
And so they listed as the numbers. So obviously what he’s saying is that the BIP number so and so is the one that deals with the HD wallet, which is the hierarchal deterministic wallet. So that’s what it is. And you guys can google that yourself.
Leon Fu: So Breadwallet implements HD, it’s an HD wallet. You remember that 12 phrase word, and you can always recover all your Bitcoins with those 12 words.
Tai Zen: So there’s no need for me to back up all the different addresses I use for my transaction.
Leon Fu: That’s right and that’s another cool feature. Many wallets do this, but Breadwallet implements this as well, which is very handy on a mobile device because when you get a new phone, you just type in those 12 words and you get your wallet back.
Tai Zen: Now that it has created a different Bitcoin address to receive a new Bitcoin transaction, what else did you want to show me?
Leon Fu: Okay, so this one, this time noticed that that’s useful because now when you go get Bitcoins from someone else, they got a new address to send to. They can’t see the last payment you got because it’s a new number
Tai Zen: And this is much more secure and safer.
Leon Fu: It’s more private, right? Because now they don’t know what other big points that other people have paid you.
Tai Zen: So basically, once you send me this one, if somebody right now that’s watching this video, they cannot go and track that account and see how a,
Leon Fu: that’s an empty account. If they do look that address up, there’s nothing in there.
Tai Zen: But if they, they looked at the account number one that you just sent me the, $3.56 to, they can go look at it again and they all they will ever see is that…?
Leon Fu: In other words, I could go, I sent you the 10,000 bits so I could go look at it and see it, but I already know I sent you. So, it’s not giving me any information.
Tai Zen: So now If you send me a second payment. No one will ever know
Leon Fu: If I send you a second payment, no one will ever know. Or if you got another payment from someone else, I would never know.
Tai Zen: So let me ask you this. So let’s say if somebody wants to go back and backtrack my account, could they go back and backtrack that it came from you and then determined that you had sent it to me again or does your Breadwallet also create a new sending address also?
Leon Fu: So I’ve studied how it does that. You have a set of private keys. Because that’s what an HD wallet does. It generates a set of private keys and then you receive Bitcoins in each of those private keys.
So when you want to send out like a, let’s say I just gave you 10,000 bits or $3 and somebody else, next guy gives you some more and the next guy gives you some more and then you send another transaction.
What it’s going to do is it’s going to take a bunch of those private keys and create like a new transaction, it creates one transaction with all of those private keys. But any kind of leftover that it has, it forwards it to another address.
So let’s say I just sent you three bucks. And you go ahead and send someone else to dollars. And then, so you get $1 in change back. It’s going to send $2 to that person’s address and then it’s going to send that leftover $1 to your own address.
Tai Zen: Each time whether you go when you send a transaction in or out, there’s always going to be a new address.
Leon Fu: There’s always going to be… So out of those $3, $2 would go to the whoever you sent it to and $1 would go to another one of your HD addresses.
Tai Zen: I see it now. I see it now. So basically when you send me some Bitcoins, it will always create a new address if I break that amount that you sent me, if I break it up into separate amounts, each of those separate amounts gets a new address too, even the remaining balance in my account gets a new address.
Leon Fu: So how do this? You can go on blockchain and go ahead and see this for yourself. If let’s say now you have those 10,000 bits and you go send 5,000 of them to someone else or send them to yourself, you can actually see this happening on blockchain.info.
Tai Zen: Okay That’s awesome men. That’s a very, very secure and that makes it even more private also.
So, all right guys, so thanks for watching this video guys, and we hope that this a quick video on what is a hierarchal deterministic wallet will help you better understand the new safety features and security features of the new versions of the new models of the Bitcoin wallets that are coming out, especially with this Breadwallet that’s coming out on the iOS phones.
And we invite you guys to check it out, comment, let the inventor of the Breadwallet know if it’s good, bad, ugly, whatever, and so that we can all make it better. Thanks for watching this video guys.
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