Lesson 20 of 20
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20. Segregated Witness – what is Segwit Bitcoin all about?

SegWit for short. What it is. It’s the biggest, non-mandatory update to the Bitcoin protocol. It involves separating the transaction signature proof from the transaction block and putting it into a separate layer. The update lowers transaction fees on the network and increases its scalability, but it doesn’t stop there. SegWit has brought many more benefits to Bitcoin, which we will talk about in this lesson. 

The activation of SegWit took place on 24 August 2017. It was carried out as a soft  fork, as there was no need to split the chain (hard fork) in its case. Only more computing power was needed for its acceptance. As we have already mentioned – it is optional, which means that supporters of classic solutions can still use the Legacy protocol. 

Creator 

SegWit was developed by Blockstream for the side chain Blockstream Elements. It was Luke-Jr – the lead developer of Bitcoin Core, who discovered how SegWit could be implemented into Bitcoin’s core protocol. From that point, the entire BitcoinCore team began working on the update. The coding was handled by Eric Lombrozo,  Johson Lau and Pieter Wuille, who also developed the Bitcoin Improvement Proposal  (BIP) – the document initiating the changes. 

SegWit – operation 

When making BTC transactions from a SegWit address, the transaction fee is much lower than from a Legacy address. This action is only possible in wallets that have been integrated with the update. Then such a wallet generates two additional SegWit addresses. One is a P2SH type and starts with 3. The other is “bech32” starting with  “bcl” and is always a SegWit address. Transactions from this address are always the cheapest. It is interesting to point out that addresses starting with “l” are always  Legacy addresses. Examples of wallets integrated with SegWit include Bitcoin Core,  Electrum, Green, Ledger, Trezor or even Exodus

SegWit vs Legacy 

A traditional BTC chain has input and output addresses and cryptographic signatures. All these elements, during a transaction, are placed in a single block of no more than 1 megabyte. Consistently, a new block is extracted by miners every 10  minutes. This form of Bitcoin’s blockchain protocol is called Legacy. 

SegWit organizes the data in a block. The block is the same size as Legacy.  However, it only allocates this capacity for transaction inputs and outputs.  Cryptographic signatures in this version have been moved outside the block and are not included in the transaction block capacity. They are included in the input and output transactions as a 3-megabyte extension to the block called “Witness data“.  Despite this separation, the update retains the digital signatures and is fully secure. 

SegWit adoption

Not all cryptocurrency exchanges have adopted the update. A report done by  Glassnode shows that only 6 exchanges have fully adopted SegWit. 

The benefits of the SegWit update 

Thanks to Segregated Witness Bitcoin: 

1. Got rid of transaction malleability, which allowed modification of an already cryptographically signed transaction. Admittedly, this feature was not a threat to the invalidity of the BTC exchange. Nevertheless, it provided the possibility to change the transaction ID, which was a bit of a trust barrier for some. 

2. Improved implementation of layer two protocols. It was due to SegWit that the introduction of, for example, Lighting Network and other Bitcoin protocol layers was possible. 

3. Increasing the block size from 1 megabyte to 4. This is four times the size. 

4. Wallet users with this update pay smaller fees for sent transactions, and the transaction approval time itself has been significantly reduced. 

5. Allows further improvements to Bitcoin to be implemented by modifying the  scripting language e.g. Schnorr Signatures. 

Summary 

We often hear that the community did not believe SegWit could solve scalability issues. It has proven otherwise. Moreover, much controversy has grown around the implementation itself. Technically, doing a hard fork would inspire more confidence and enthusiasm, but it would also have its drawbacks, which developers said would be much more difficult to overcome. 

There have also been many conspiracy theories surrounding SegWit. The update was rumoured to allow miners to steal funds. Well, so far no miner has succeeded.  SegWit adoption is growing, but still not everyone is taking advantage of it. Many companies or users still need time to implement it, even though it has been 4 years since its release. Moreover, there are still wallets and apps in the crypto environment that are not able to integrate with the app. SegWit is also something of a protest.  There are users who would like another scaling solution, which means they will never choose to adopt SegWit.

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