Wrong Derivation Path - A Proven Way To Lose Your Crypto
If you haven't taken note of your Cryptocurrency Wallet Derivation Path, you may be unable to recover your Coins.
You must learn what a Wallet Derivation Path is, where to find it, and take note of it along your wallet seed phrase.
Taking note of a wallet seed phrase is NOT sufficient.
Will Your Heirs Be Able To Restore Your Wallet?
Let's hope for the best but prepare for the worst.
Here there is a short fictional educative story:
Mr.ChadCryptoWhale5000 is a Solana maximalist who accumulated thousands of SOL coins in a Solana wallet. Unfortunately, Mr.ChadCryptoWhale5000 passes away without leaving behind any inheritance plan.
His direct heirs take possession of the apartment where he lived and his belongings. Then, they sort out the belongings they want to keep from those they will dispose of.
Mr. ChadCryptoWhale5000's laptop goes to one of the family's juniors, who formats it, re-installs Windows, and uses it for school. Goodbye, Solana wallet.
While cleaning Mr.ChadCryptoWhale5000's desk, his brother finds a piece of paper with 12 words written on it.
Mr.ChadCryptoWhale5000's brother has heard a little about cryptocurrencies, so he thinks that maybe those 12 words are part of a seed phrase and decides to find out how to restore the seed phrase to a cryptocurrency wallet.
The sad ending
The brother has very limited knowledge about cryptocurrencies and only knows about Bitcoin and Ethereum. After some research, he installs an Ethereum wallet and a multi-coin wallet on his computer. Then he restores the seed phrase to both wallets, but in both cases, THE BALANCE DISPLAYED IS ZERO.
At this point, the brother decides not to waste more time, uninstall the wallets from his computer, and throw the paper into the bin.
The 'happy' ending
Mr.ChadCryptoWhale5000 has copied not only the seed phrase but also the Solana derivation path: m/44'/501'/0'/0'
Mr.ChadCryptoWhale5000's brother does not know what m/44'/501'/0'/0' stands for, but after a short internet search, we find that most probably this number belongs to a Phanton wallet and proceeds to install the wallet to his browser and restore the seed phrase.
The wallet's balance is displayed, and, to his surprise, Mr.ChadCryptoWhale5000's brother finds out that he may be able to retire already.
The ideal ending
Mr.ChadCryptoWhale5000 looked after his health and lived for many years.
During that time, he accumulated even more crypto assets. Still, being very crypto safety conscious, he decided to create a crypto inheritance plan to ensure his family could benefit from all his assets once the time came.
For that, he documented his entire portfolio and wrote instructions on how to retrieve the assets. Then, he stored all that information in a home safe box and instructed his family to open the safe in case something happened to it.
Will You Be Able To Restore Your Wallet?
Most probably, yes, but it may be more stressful than you think if you haven't taken note of the derivation path.
As described by walletrecovery.org:
While great advances have been made in interoperability and recoverability, developers across the industry continue to build wallets that either:
- Don’t implement BIP standard(s).
- Implement a BIP standard, but inconsistently when compared with other wallets.
- Implement a BIP standard, but one that has not been widely adopted (and perhaps only by them).
- Don’t have clear documentation about their derivation paths, backup, and recovery processes.
This chart (crypto safety first author's note: visit their website to see the chart) is meant to gather information about wallet defaults for external recovery. Wallets come and go, information gets lost, and users are left with tears. Responsible wallet developers document external recovery. Users should not have to dig through the source code to figure out the Derivation Paths or Redeem Scripts.
The authors of Wallet Recovery have very well described the situation you may find yourself in in a few years. Do not trust that in 10 or 15 years, you will be able to restore a seed phrase and recover your wallet.
You must take note of the derivation path along the seed phrase. It only takes a few minutes to Record the information you will need in a few years.
Wallet Name, Year, Derivation Path, and Seed Phrase
If you want to make sure that in a few years, you or your heirs can recover your coins, today, you need to take note of the following:
- Wallet name
- The year the wallet was created
- Derivation Path
- Seed phrase words
And store all that information so that, for years and years to come, it remains safe from hacks, robbers, and elements.
Where to find the wallet derivation path?
It depends on the wallet, so the best is to search where to find the derivation path for your specific wallet.
For example, if you search for the Ledger wallet derivation path, one of the first results is 'Understanding crypto addresses and derivation paths in Ledger Live' that explains:
In Ledger Live, on the Account page, you can find the derivation path by clicking Edit account -> ADVANCED -> freshAddressPath
If you search for the Metamask wallet derivation path, one of the first results is 'Importing a seed phrase from another wallet software' that declares:
When importing a Secret Recovery Phrase (seed phrase), MetaMask only supports the default BIP-44 derivation path (m/44'/60'/0'/0).
Derivation Path Explained
The sequence "m / purpose' / coin_type' / account' / change / address_index" represents a hierarchical deterministic (HD) path used in the context of BIP32 (Bitcoin Improvement Proposal 32), which is a standard for creating hierarchical deterministic (HD) wallets.
This path is commonly used in the BIP44 standard, which defines a multi-account hierarchy for different cryptocurrencies within a single wallet.
Let's use the Bitcoin derivation path as an example: m/44'/0'/0'/0/0.
(But you can find all coin derivation paths in this List Of Derivation Paths web page.)
m (Master Key) - m/44'/0'/0'/0/0.
The 'm' stands for the master key, which is the starting point of the HD wallet. It is a root key from which all other keys in the hierarchy are derived. This key is usually generated from a random seed or a mnemonic phrase.
purpose' (Purpose) - m/44'/0'/0'/0/0.
The 'purpose' is a constant hardened derivation index. The apostrophe (') indicates a hardened key, meaning it cannot be derived directly from the master key but only from a hardened parent key. The purpose field specifies the purpose of the key derivation. For example, purpose' 44 is commonly used for BIP44, a standard for multi-account hierarchical deterministic wallets.
coin_type' (Coin Type) - m/44'/0'/0'/0/0.
The 'coin_type' is another hardened derivation index specifying the cryptocurrency type. Each cryptocurrency has a unique coin type. For example, Bitcoin is typically associated with coin_type' 0, while Ethereum is associated with coin_type' 60.
account' (Account Index) - m/44'/0'/0'/0/0.
The 'account' field represents the account index and is a non-hardened derivation index. It indicates which account within the specified coin type is being accessed. Users may have multiple accounts within the same coin type, allowing for better organization of funds.
change (Change)- m/44'/0'/0'/0/0.
The 'change' field is a non-hardened derivation index distinguishing between receiving and change addresses. A value of 0 typically indicates a receiving address, while 1 indicates a changed address. This is useful for managing transactions and improving privacy.
address_index (Address Index) - m/44'/0'/0'/0/0.
The 'address_index' is a non-hardened derivation index specifying the index of a specific address within the account. It is used to generate unique addresses for receiving or change purposes.
Putting it all together, the path "m / purpose' / coin_type' / account' / change / address_index" provides a systematic way to derive hierarchical deterministic keys for managing cryptocurrency accounts, addresses, and transactions within a wallet.
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Congratulations on completing this 5-minute digital safety power-up.
We hope this 5 minutes read was worth the time and that you have learned some valuable information.
