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Fundament of the week – SegWit

In this article, we will look at the somewhat more mysterious, but certainly often mentioned acronym SegWit. What does it mean for Bitcoin? We will discuss this below.

What is SegWit?

SegWit is the name of the Bitcoin Protocol (BTC) update, which was implemented on August 23, 2017. Its concept was formulated by BTC developer Pieter Wuille.

As with any decentralized blockchains, if it is necessary to update the BTC algorithm, it is up to the developers to agree on how and when to make these changes all at once. In this way, the SegWit update was designed to help scale BTC and fix some of the bugs that posed a risk. SegWit is best known for the way it updates how the data is stored on the BTC blockchain.

SegWit is the process of increasing the block size limit on a blockchain by removing signature data from BTC transactions. Once certain parts of a transaction are deleted, it frees up space or capacity that can be then used to accommodate more transactions to the chain.

  • SegWit is a BTC-related action that is designed to help increase the block size limit on a blockchain
  • SegWit helps increase the block size limit by extracting signature data from BTC transactions
  • The term SegWit means segregated witnesses (who are signed under transactions)
  • Segwit block vs non-segwit blocks Figure 1: Comparison of Non-SegWit vs SegWit block solution

    Understanding SegWit

    Bitcoin blockchain consists of several systems distributed in a peer-to-peer network. These systems are called nodes and serve as BTC transaction managers/overseers. All transactions made in the BTC are duplicated across these nodes, making it virtually impossible to penetrate and damage the transaction.

    Transaction data that is shared on multiple nodes consists of two components - inputs and outputs . More than one input and output can be involved in a transaction. The output means the public address of the recipient. By input, we mean the public address of the sender. The sender needs the public address of the recipient in order to send him the funds. Most of the space in a transaction is taken up by a signature, a part of the entry, that verifies that the sender has the necessary means to make the payment. Thus, Bitcoin moves from inputs to outputs for each transmitted transaction. If each of the nodes validates the transaction as valid at once, the transaction is included in the block that is then added to the string or the general ledger for public access.

    Challenges for BTC platforms

    The problem facing the BTC platform is that if more and more transactions are taking place, more blocks need to be added to the chain. Blocks are generated every 10 minutes and are limited to a maximum size of 1 MB. Due to this limitation, only a certain number of transactions can be added to a block. The weight of the transactions represented by the blocks weighs down the network and causes delays in processing and verifying transactions. In some cases, it takes several hours for the transaction to be confirmed. Imagine all the BTC transactions that have taken place since the inception of BTC in 2009, if they were still dwelling on a blockchain and still accumulating. In the long run, the system would not be sustainable without radical change .

    At a basic level, SegWit is a process that changes the way data is stored, helping the bitcoin network run faster and more smoothly.

    SegWit designed as a solution

    BTC developer, Dr. Pieter Wuille, suggests that to solve this problem, it is necessary to separate the digital signature from the transaction data. The process is known as "segregated witness" or SegWit. A digital signature represents 65% of the space in a given transaction. SegWit attempts to ignore the data attached to the signature by deleting the signature from inside the input and moving it to the structure at the end of the transaction. This would increase the 1 MB limit for block size to almost 4 MB. In addition to increasing the capacity of the blocks, SegWit also solves the problem when the receiver can capture and modify the sender's transaction identifier in an attempt to obtain more coins from him. Because the digital signature would be separated from the input, the unscrupulous party would not be able to change the transaction ID without revoking the digital signature.

    Why is the adoption of SegWit still incomplete?

    SegWit was not fully accepted by all participants in the BTC network because it is not mandatory, but also due to different incentives among users in the ecosystem. Despite the advantages of the SegWit segment, not all participants in the BTC network have implemented it. This shows us what roles individuals play in the entire BTC network and how sometimes conflicting incentives contradict each other.

    For example, BTC is not just an "upgrade" - it relies on wallets, exchanges, and companies to use it to innovate and send changes to the network accordingly. No one is required to accept a SegWit segment. It is up to the engineering teams to put their organizations in the right direction. Which cannot always be expected to happen.

    By the time SegWit appeared, there were already billions in the BTC market, so the corporate bureaucracy consisted only of a small fraction of these companies that were acting agile. The final decision on whether to launch SegWit with new software and economic updates or maintain the status quo is often in the hands of reluctant executives, not enthusiasts. Another unbalanced stimulus is the motivation of miners, who preferred the use of AsicBoost firmware. It was incompatible with the SegWit segment but reportedly helped them verify transactions up to 20% faster.

    As the price of BTC rises and the whole ecosystem becomes busier, users are attracted to more efficient solutions with SegWit support. This forces companies to adapt.

    BTC is slowly recovering from the fall in 2018 and 2019. The fees that users pay for transactions are also rising. Using a wallet with SegWit support is advantageous because the transaction blocks processed by the miners serving these wallets have a higher weight (i.e., transaction density) leading to speed and cost-efficiency. The migration of users to these wallets and SegWiit tools has been greatly accelerated. Since 2019, SegWit segment consumption has increased from 39% to more than 50.5%.

    SegWit BTC transaction usage increase Figure 2: Increase in SegWit BTC transaction usage

    Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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