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BIP 32 (Hierarchical Deterministic Wallets)

BIP 32 is the Bitcoin Improvement Proposal which introduced the standard of Hierarchical Deterministic (HD) wallets and extended keys to Bitcoin.

BIP 32 was a significant improvement for Bitcoin wallets in several ways. First, HD wallets greatly improved the interoperability of wallets, as a set of keys could be transferred between wallet software with a single extended private key (xprv).

Likewise, the recoverability of wallets was improved, as a single seed could recover the entire wallet. This improvement was extended with BIP 39, which made seeds easier to store and remember.

Lastly, BIP 32 enabled watch-only wallets, which can store and generate new addresses, allowing the user to receive payments and check their balances without ever needing to use private keys. Watch-only wallets enhance a user’s security by allowing them to keep their private keys in cold storage, while continuing to receive bitcoin, track balances, and craft transactions.