What is Segregated Witness?

Segregated Witness (SegWit) is a protocol upgrade developed in 2015. The concept was introduced to address the scalability issues currently faced by blockchain networks.

On average, the Bitcoin network validates a new block every 10 minutes, with each block containing several transactions. Thus, the block size directly affects the number of transactions that can be confirmed in each block. Currently, the Bitcoin blockchain can process approximately 7 transactions per second.

The main idea behind SegWit is to reorganize block data so that signatures are no longer stored with transaction data. In other words, the SegWit upgrade involves segregating the witness (signatures) from the transaction data. This allows more transactions to be stored in a single block, thereby increasing the network's transaction throughput.

Since only about 7 transactions can be processed per second, Bitcoin transactions can sometimes take a long time to complete. Compared to traditional payment solutions and financial networks (which can process thousands of transactions per second), this is much slower.

SegWit was developed in 2015 by Bitcoin developer Pieter Wuille and other Bitcoin Core contributors. In August 2017, the SegWit upgrade was implemented as a soft fork on the Bitcoin network.

Today, several cryptocurrency projects use the SegWit protocol, including Bitcoin and Litecoin. The protocol upgrade offers many advantages, such as improved transaction speed and block capacity. Additionally, SegWit also resolves the so-called transaction malleability issue (discussed below).

What Are the Main Advantages of SegWit?

1. Increased Capacity
   One of the biggest advantages of SegWit is the increased block capacity. By removing signature data from transaction inputs, more transactions can be stored in a single block.

Transactions consist of two main parts: inputs and outputs. Essentially, inputs contain the sender's public address, while outputs contain the recipient's public address. However, the sender must prove they have transferred the funds and must use a digital signature.

Without SegWit, signature data can occupy up to 65% of a block. With SegWit, the signature data is removed from the transaction inputs. This increases the effective block size from 1 MB to approximately 4 MB.

Note that SegWit is not merely an increase in block size. Rather, it is an engineering solution that increases the effective block size without raising the block size limit (which would require a hard fork). More specifically, the actual block size remains 1 MB, but the effective block size limit is 4 MB.

Additionally, SegWit introduces the concept of block weight. We can think of block weight as an alternative to block size. Essentially, block weight is a unit of measurement that includes all block data: transaction data (1 MB) and signature data (up to 3 MB), which is no longer part of the input fields.

2. Improved Transaction Speed
   In addition to blocks that can store more transactions, SegWit also improves transaction speed due to the larger amount of transaction data that can be stored in the blockchain. Even though the block time remains the same, more transactions can fit into a block, resulting in higher TPS.
   The improved transaction speed also helps reduce transaction costs on the Bitcoin network. Before SegWit was implemented, transaction fees were often above $30 per transaction. However, with SegWit, transaction costs dropped significantly to around $1 per transaction.

3. Transaction Malleability Fix
   Another major issue faced by Bitcoin is the tampering of transaction signatures. If a signature is altered, it can disrupt the transaction between two parties. Since data stored on the blockchain is effectively immutable, invalid transactions would remain permanently on the blockchain.

With SegWit, signatures are no longer part of the transaction data, eliminating the possibility of altering this data. This fix enables further innovation within the blockchain community, including layer-2 protocols and smart contracts.

SegWit and the Lightning Network

By fixing transaction scalability issues, the development of layer-2 protocols became necessary. In short, layer-2 protocols are new platforms or products built on top of blockchains like Bitcoin. One of the more popular layer-2 protocols is the Lightning Network, an off-chain payment network.

The Lightning Network is a layer-2 protocol that operates on the Bitcoin network. Its main purpose is to enable more transactions to be confirmed in a shorter time, providing users with faster transactions. Transactions are collected off-chain, forming an effective buffer for the Bitcoin network to process them eventually.

The Lightning Network was initially developed for Bitcoin. However, several other cryptocurrencies and blockchain projects are also working to implement this technology. This not only reduces confirmation times but also facilitates the development of solutions to scalability issues.

SegWit vs. SegWit2x
SegWit is a soft fork upgrade, meaning it is backward-compatible. In other words, Bitcoin nodes that have not updated to SegWit can still process transactions. However, there was another proposed version of SegWit called SegWit2x (S2X), which would have required a hard fork upgrade.

The main difference between SegWit and SegWit2x is that the latter would have included not only changes to transaction batching but also an increase in block size (from 1MB to 2MB). Nonetheless, a larger block size would increase the burden on node operators and miners, as they would have to process more data.

Another notable difference is that the SegWit proposal was supported and implemented by the Bitcoin community. This also gave rise to the concept of UASF, which stands for User-Activated Soft Fork.

On the other hand, SegWit2x proposed substantial changes to the fundamental rules governing Bitcoin. However, since developers could not reach a consensus on its adoption and implementation, SegWit2x was ultimately suspended.

Nested SegWit vs. Native SegWit (bech32)

In short, Native SegWit (also known as bech32) is an updated version of Nested SegWit. Bech32 addresses offer faster transaction speeds, better error detection mechanisms, and even lower transaction fees. Additionally, bech32 addresses are in lowercase, making them easier to read. Note that transactions between non-SegWit (i.e., legacy Bitcoin addresses), Nested SegWit, and SegWit (bech32) addresses are fully compatible. However, not all trading platforms and crypto wallets support SegWit, so you cannot directly send funds to a non-SegWit address. Binance supports SegWit addresses for BTC deposits and withdrawals. For more information, refer to the SegWit FAQ.

Conclusion

The implementation of SegWit marked a major upgrade to the Bitcoin protocol, supported and implemented by a decentralized community, making it even more appealing.

The launch of SegWit effectively addressed issues related to Bitcoin and other blockchain networks, representing an important step forward in scalability. By combining SegWit with layer-2 protocols, blockchain networks can handle a higher volume of transactions with greater efficiency and lower costs.

Although SegWit is a powerful and highly innovative solution, it has not yet been fully adopted. Currently, about 53% of Bitcoin addresses use the SegWit protocol.