How Do Crypto Exchanges Handle an Unlimited Number of Wallets?

Rashad Ansari
4 min readSep 12, 2023

Summary

Cryptocurrency exchanges, those digital hubs where you can buy, sell, and trade digital assets, rely on nifty technology to handle endless wallets. One crucial tool in their arsenal is HD wallets, which are Hierarchical Deterministic wallets. Let’s break down what HD wallets are and how they work.

HD Wallets

In the world of cryptocurrency, HD wallets are like the tech wizards. They’re the upgraded versions of regular wallets, and the “HD” part means they can make lots of new wallet addresses from one master key. Picture this master key as the kingpin; all the other addresses are its loyal subjects.

So, how does it work? Well, with HD wallets, you start with one master key. Think of it as your secret passcode to the kingdom of cryptocurrency. This master key is like magic because it can create almost endless wallet addresses. Each new address is connected to the master key but is unique, like branches of a massive crypto tree.

Now, the cool part is that HD wallets use math and structure to make this happen. They rely on something called a “deterministic algorithm”. It’s like a special math trick that ensures if you start with the same “seed”, you’ll always get the same sequence of wallets. It’s magic, but with numbers!

Imagine your master key as the seed of a crypto tree. From this seed, your wallet can grow branches, and each branch becomes a unique wallet address. Think of your master key as the root of your wallet tree, and the child wallets are the branches.

Here’s where it gets fascinating. Your master key creates child keys through math. These child keys are like branches growing from the main trunk, and each one corresponds to a unique wallet address. And guess what? You can create as many child keys and wallet addresses as you want, all from that one master key.

In this family tree of keys, there are two types: hardened and non-hardened. Hardened keys are like the strong branches that can only create child keys, not grandchild keys. Non-hardened keys…

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Rashad Ansari

Curious and continuously learning software engineer, driven by crafting innovative solutions with passion. Let’s collaborate to shape a better future!