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An A-Z Guide to SegWit

10/09/2018
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An important event for all BTC miners and traders – SegWit activation – took place in August 2017. Thus, all people related to the Bitcoin market in some way are now eager to find out, “what is segwit?” Read on to find out what is segregated witness, to see how it works, and to make conclusions concerning its impact on your crypto-assets.

What is SegWit?

The core of all Bitcoin transactions and creation of new coins is the blockchain; it represents a technology with which BTC-related information is stored. With the immense popularity of this cryptocurrency and thousands of miners increasing the blockchain every second, BTC faced a scaling problem. While the maximum block size of the BTC main protocol is 1MB, and the BTC blockchain has the maximum processing capacity of seven blocks per second, there was a clear limit to the system’s growth. Moreover, without SegWit, BTC could not process many transactions quickly, which prevented it from becoming a high-volume payment technology.

Literally, the name of this improvement explains its nature: ‘to segregate’ means to separate something, while ‘witness’ means the BTC transaction signature, witness data. Thus, SegWit was a soft fork implemented in the BTC-based networks. Prior experience of SegWit implementation in Litecoin and Bitcoin Gold showed a great operational improvement, with up to 70% growth of transactions’ volume within the same block size.

Bitcoin SegWit

So, how does SegWit work? Interestingly, it was initially aimed to fix the transaction malleability bug in the system, which allowed transaction ID modification by unauthorized parties. Though such minor interference could not cause BTC theft or any other problem like that, it was potentially hazardous in terms of creating second-layer protocols and smart contracts, a highly undesirable byproduct of the BTC blockchain operation.

What happened with the activation of SegWit? In simple words, the Segregated Witness Bitcoin removed the “witness” information from the transaction blocks. The latter refers to unique user signature data. The essence of that change was to enable signature data alterations without any interference with the BTC transaction ID.

However, together with fixing the minor malleability problem, the SegWit appeared to give the BTC system a much greater improvement. Without the signature data, blocks appeared to weigh much less, which allowed to increase the BTC processing throughout and to process more blocks per second.

Does this mean that the forking of the BTC blockchain took place and we should expect SegWit coins to emerge? No panic! There is no SegWit coin as such, and there is no need to open a SegWit wallet to continue working within the BTC system, as the updated version is fully compatible with the old protocol. SegWit simply splits the transaction into two segments: the original portion of data (that with the sender and receiver data) now does not contain witness data, which is appended as a separate structure at the end. Such splitting allows counting of the original portion’s normal size, while witness data now counts as ¼ of its real size.

What Is Segregated Witness Doing?

What is SegWit Bitcoin for the system overall? With SegWit, it is now much securer to work with BTC, especially with unconfirmed transactions, as the malleability issue is resolved and the small window for hacking is closed. Moreover, SegWit represents another step forward to the launch of the lightning network – a new technology within the BTC universe aimed to increase its transaction capacity by removing frequent, small-size transactions.

While the transfer to SegWit-supported BTC transactions was slow, the indisputable benefits thereof included a sizeable reduction of transaction processing fees, as more blocks could be included into one transaction. To start enjoying the improved operation, users had to upgrade their wallets to incorporate the SegWit feature. Bitcoin Core, the leading wallet used for BTC transactions, completed the adjustment to SegWit updates in the first quarter of 2018.

Other improvements in the overall BTC operation were triggered by SegWit, all directed towards further increases in the BTC processing capacity. Most notable of them are the boost of MAST development (this technology works with complex BTC smart contracts), Schnorr signatures (another feature for capacity increments), and TumbleBit – the initiative for the creation of an anonymous top-layer network.

It is also notable that together with SegWit, another solution emerged as SegWit2X. Its mechanism of operation involved using the SegWit technology and the 2MB blocks hard fork. This development offered another block size increase and promised much higher BTC system’s scalability, but its technical differences were more profound than those of SegWit (it used a different signaling bit), so it was not supported by the BTC community and was cancelled in November 2017.

Segregated Witness: Bitcoin Solution

So, now, answering the question, “what is Bitcoin SegWit?”, you should keep in mind that it is not a forked BTC protocol. In essence, everything remained the same in the Bitcoin world, except for the improved speed of processing. However, it’s also necessary to keep in mind that SegWit is a new transaction structure that not all BTC system users liked, and which in part served as the reason for a major divide among them, with the forking of BTC Cash from the main blockchain.

Should we expect the Ethereum SegWit to be launched any time soon? Maybe, as BTC SegWit was not the first one – the initial improvement was made with Litecoin in May 2017, and BTC followed to derive the benefits of improved transaction throughput. Thus, it is highly probable that Ethereum will become another blockchain to introduce this new feature for improved speed and functionality.

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