The year 2017 saw the rise of digital currencies and blockchain technology. Most cryptocurrencies had seen a 10x increase in value by the end of the year. Bitcoin, the father of all cryptocurrencies, surged by 1900% to hit an all-time high of $20,000 in January 2018.

As Bitcoin grew in value, so did its recognition and adoption. Satoshi Nakamoto, the pseudonym behind the creator of Bitcoin, hadn’t intended there to be so many transactions when he first created the Bitcoin network. As the network grew, so did the processing of payment slowed down. To resolve this scalability issues, the Bitcoin network implemented Segregated Witness (SegWit) on 24, 2017.

What is SegWit?

SegWit is the process of removing the signature data from Bitcoin transactions in order to increase the block size limit of the blockchain. When certain parts of a transaction are removed, this frees up space or capacity to add more transactions to the chain.

In other words, Segwit is a technological add-on to Bitcoins network to help dissect the transaction to make the data smaller. Smaller data means faster and safer transaction times since there is work being outsourced.

The SegWit idea was initially released in October of 2016. It was the result of one long year of discussion and work that was undertaken at the Bitcoin Scaling Conference in Hong Kong. The concept was formulated by Pieter Wuille, a member of the Bitcoin core team. 

How will SegWit Improve Bitcoin Scalability?

The bitcoin blockchain consists of multiple systems distributed across a peer-to-peer network. These systems are called nodes and serve as the administrators of Bitcoin transactions. All transactions made in Bitcoin are duplicated across these nodes, making it virtually impossible to hack into and corrupt a transaction.

The transaction data that is shared across the multiple nodes consists of two components – inputs and outputs. There could be one or multiple inputs and outputs involved in a transaction. The output is the public address of the recipient. The input is the public address of the sender. The sender needs the recipient’s public address in order to send funds to him or her. The majority of space in a transaction consists of a signature, a part of the input, which verifies that the sender has the required funds to make a payment. So in effect, a Bitcoin moves from inputs to outputs for each transaction transmitted. Once each of the nodes has verified the transaction as valid, the transaction is included in a block which is added to the chain or the general ledger for public access.

The problem that the Bitcoin platform is facing is that as more and more transactions are being conducted, more blocks have to be added to the chain. Blocks are generated every 10 minutes and are constrained to a maximum size of 1 megabyte (MB). Due to this constraint, only a certain number of transactions can be added to a block. The weight of the transactions, represented by the blocks, is weighing down the network and causing delays in processing and verifying transactions, in some cases, taking hours to confirm a transaction as valid. Imagine all Bitcoin transactions that have been carried out since the inception of Bitcoin in 2009 sitting on the blockchain and still piling up. Long term, the system would not be sustainable if a radical change is not made.

Dr. Pieter Wuille suggests that to solve this problem, the digital signature needs to be segregated from the transactions data. This process is known as Segregated Witness or SegWit. Digital signature accounts for 65% of the space in a given transaction. SegWit attempts to ignore the data attached to a signature by stripping off the signature from within the input and moving it to a structure towards the end of a transaction. This would increase the 1 MB limit for block sizes to a little under 4 MB. In addition to slightly increasing the capacity size of blocks, SegWit also solves the problem where a receiver could intercept and modify the sender’s transaction ID in a bid to get more coins from the sender. Since the digital signature would be detached from the input, the unscrupulous party would have no way of changing the transaction ID without also nullifying the digital signature.

 Benefits of SegWit

  1. Faster Transactions: Segwit’s main purpose is definitely not to make transactions faster but to prevent malleability. However, it indirectly allows faster confirmations by fixing the malleability. Just like it will take you longer to download a movie compared to a song because the movie is a bigger file, this works the same.
  2. Cheaper Transactions: Transaction fees were decreased with Segwit because SegWit transactions allow for more capacity and signatures are weighted differently..
  3. Safer Transactions: Segwit makes it harder for the network to be hacked since it outsources the work.
  4. More Transactions: The problem with having a bigger block size is because first of all it does not go with the vision of the original Bitcoin whitepaper. When Segwit was implemented, it quickly saw a decrease in the memory pool, which holds all the unconfirmed transactions. It noticed the unconfirmed transaction data drastically decreased from 140 million bytes to 6 million bytes all while the number of transaction per day stayed the same.
  5. Lightning Network: The lightning network is a level 2 add-on technology that will allow two people to transact as many times between them before it settles on the blockchain. This goes back to the scaling issue which can potentially create the ability to have more transaction than any Visa.

SegWit Vs. SegWit2x:

The SegWit process increases the block size limit without increasing the actual size of the block (1Mb). Whereas proposed SegWit2X increases the block size from the present 1MB to 2MB.

SegWit was implemented as a soft fork in the bitcoin blockchain on 24th August 2017. Proposed SegWit2x is the hard fork in the bitcoin blockchain. SegWit2x could not be implemented as there are no backers.

Platforms which adapted Segregated Witness:

Segregated Witness was implemented on 24th August 2017 in bitcoin blockchain. SegWit has also been implemented in other digital currency networks such as Litecoin, DigiByte, Vertcoin, and Syscoin.

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