Key derivation is the process of generating new cryptographic keys from an existing key or seed. This is essential for managing multiple keys without having to store each one separately. In many systems, a single master key can be used to produce multiple child keys. This keeps activities organized and enhances security, as the master key can remain offline while child keys are used for different transactions or purposes. The process often involves using functions like HMAC (Hash-based Message Authentication Code) or KDF (Key Derivation Function) to transform the master key into the new keys. Key derivation helps in implementing hierarchical deterministic wallets, where all keys are derived from a single seed, allowing users to manage their funds efficiently while maintaining privacy and security. This way, if one key is compromised, it doesn’t jeopardize the entire wallet.