Mastering Bitcoin, 3rd Edition

Chapter 5. Wallet Recovery

Creating pairs of private and public keys is a crucial part of allowing Bitcoin wallets to receive and spend bitcoins. But losing access to a private key can make it impossible for anyone to ever spend the bitcoins received to the corresponding public key. Wallet and protocol developers over the years have worked to design systems that allow users to recover access to their bitcoins after a problem without compromising security the rest of the time.

In this chapter, we’ll examine some of the different methods employed by wallets to prevent the loss of data from becoming a loss of money. Some solutions have almost no downsides and are universally adopted by modern wallets. We’ll simply recommend those solutions as best practices. Other solutions have both advantages and disadvantages, leading different wallet authors to make different trade-offs. In those cases, we’ll describe the various options available.

Independent Key Generation

Wallets for physical cash hold that cash, so it’s unsurprising that many people mistakenly believe that Bitcoin wallets contain bitcoins. In fact, what many people call a Bitcoin wallet—which we call a wallet database to distinguish it from wallet applications—contains only keys. Those keys are associated with bitcoins recorded on the blockchain. By proving to Bitcoin full nodes that you control the keys, you can spend the associated bitcoins.

Simple wallet databases contain both the public keys to which bitcoins are received ...