This BIP defines a sane hierarchy for deterministic wallets based on an algorithm described in BIP-0032 (BIP32 from now on), purpose scheme described in BIP-0043 (BIP43 from now on), and multi-account hierarchy described in BIP-0044 (BIP44 from now on).
With the increase of adoption of new technologies such as [https://github.com/bitcoin/bitcoin/blob/master/doc/descriptors.md the descriptor language] it is necessary to create a common derivation scheme that makes use of all new technologies.
where the BIP43 <code>purpose'</code> path is separate for each script (P2PKH, P2WPKH-in-P2SH, and P2WPKH respectively). However, these per-script derivations are made redundant with descriptors, which describe a collection of output scripts. Note also that these BIPs are restricted for single sig wallets. This is unecessary, as descriptors handle whether the scripts are single-key or multi-key.
Like BIP44/49/84, BIP45 unecessarily demands a single script type (here, P2SH). In addition, BIP45 sets <code>cosigner_index</code> in order to sort the <code>purpose'</code> public keys of each cosigner. This too is redundant, as descriptors can set the order of the public keys with <code>multi</code> or have them sorted lexicographically (as described in [https://github.com/bitcoin/bips/blob/master/bip-0067.mediawiki BIP67]) with <code>sortedmulti</code>. Sorting public keys between cosigners in order to create the full derivation path, prior to sending the key record to the coordinator to create the descriptor, merely adds additional unnecessary communication rounds.
Rather than following in BIP 44/49/84's path and having a separate BIP per script after P2SH (BIP45), vendors decided to insert <code>script_type'</code> into the derivation path (where P2SH-P2WSH=1, P2WSH=2, Future_Script=3, etc). As described previously, this is unnecessary, as the descriptor sets the script. While it attempts to reduce maintainence work by getting rid of new BIPs-per-script, it still requires maintaining an updated, redundant, <code>script_type</code> list.
The hierarchy proposed later in this paper solves these issues and is quite comprehensive. It allows the handling of multiple accounts, external and internal chains per account, and millions of addresses per chain, regardless of the script or signature type.
Any wallet that supports descriptors inherently supports deterministic key sorting as per BIP67 (through the <code>sortedmulti</code> function) so that all possible multisignature addresses/scripts are derived from deterministically sorted public keys.
We should not be mixing keys and scripts in the same layer. The wallet should create extended private/public keys independent of the script or signature type, whereas the descriptor language tells wallets to watch (single or multi-sig) outputs with the specified public keys.
We define the following 5 levels in the BIP32 path:
Coin type <code>0</code> for mainnet and <code>1</code> for testnet.
Hardened derivation is used at this level.
===Account===
This level splits the key space into independent user identities, following the BIP44 pattern, so the wallet never mixes the coins across different accounts.
Users can use these accounts to organize the funds in the same fashion as bank accounts; for donation purposes (where all addresses are considered public), for saving purposes, for common expenses, etc.
For example, in multisignature wallets, before sending a new key record to a coordinator, the wallet must increment the <code>account'</code> level. Before creating it's own single signature wallet, the <code>account'</code> level must again be incremented.
This prevents key reuse - across single signature and multisignature wallets, across ECDSA and Schnorr signatures, and inbetween the same wallet types.
Constant 0 is used for external chain and constant 1 for internal chain (also known as change addresses). External chain is used for addresses that are meant to be visible outside of the wallet (e.g. for receiving payments). Internal chain is used for addresses which are not meant to be visible outside of the wallet and is used for return transaction change.
