BIP 32 is the Bitcoin Improvement Proposal which introduced the standard of Hierarchical Deterministic (HD) wallets and extended keys to Bitcoin. This proposal, authored by Pieter Wuille in 2012, outlined a system for generating wallets in a deterministic manner. 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.

The core innovation was that the seed was the starting point from which a tree-like structure of keys could be generated. This structure is hierarchical allowing keys to be created in branches. !An infographic illustrating the structure of BIP 32 Hierarchical Deterministic (HD) Wallets, showing how a seed phrase gives rise to multiple accounts each with its own private key, public key, and address.

This allowed for a highly organized system where different branches could represent different accounts, further enhancing privacy and security. 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.