As the biggest cryptocurrency on the planet in terms of market value, Bitcoin’s popularity has increased exponentially since it first made its public debut in 2009. As a result, its blockchain has required some improvements to ensure that it can cope with rising demand from Bitcoin users who want to trade and invest in BTC.
One of the biggest improvements made to the Bitcoin network has been the implementation of Segregated Witness (SegWit), a transaction protocol that has greatly improved speed and security. In this AAG Academy guide, we’ll look at SegWit in-depth, including its purpose, its advantages, and why it was necessary to ensure the smooth running of Bitcoin.
Segregated Witness, which is more commonly known as “SegWit,” is a Bitcoin transaction format that was introduced to address a number of growing issues with Bitcoin’s original transaction system. It has been implemented as a “soft fork” on the Bitcoin network, which is a change or improvement to the existing blockchain, rather than a brand new one.
SegWit has its own wallet address format, which requires a wallet app that supports the SegWit protocol. It also means that users must play close attention to the networks they are using when carrying out transactions, which we will look at in more detail later in this guide.
Bitcoin continues to use the same proof-of-work (PoW) consensus mechanism for verifying transactions that has been employed since its launch in 2009. This relies on a network made up of thousands of computers, or nodes, that verify every transaction and group them into blocks that can then be added to the rest of the chain — a distributed ledger that is sent to all nodes.
It takes around 10 minutes to create a new block, and under Bitcoin’s original system, each one had a maximum size of just one megabyte (1MB), which doesn’t allow for many transactions to be grouped together. Over the years, as Bitcoin’s popularity grew and network demand increased significantly, it became apparent that this size limitation would not be enough.
The sheer number of Bitcoin transactions began having a major impact on network performance, meaning that in some instances, it took several hours to confirm a transaction was valid. The SegWit protocol was created to solve this problem by not only increasing block size, but by also reducing the amount of data each transaction eats up.
You might be interested in: Understanding nodes and their functions in the blockchain
Whenever a Bitcoin transaction takes place, the sender provides some key pieces of data: public addresses and a private key. The public addresses are essentially the digital identifiers of the wallets that the BTC is being sent from and received by. The private key is like a digital fingerprint; it is used to verify that the sender is the true owner of the assets they’re using.
The sender will also submit the amount of Bitcoin being transferred and a transaction fee for the miners that will process the request. Once the transaction has been received by the network, it is added to a queue until a new block is created. This block is verified by all nodes on the network, and it does not get approved unless at least 51% of them agree that it is valid.
Although the data required for each transaction individually isn’t a great deal, there are only so many (depending on the amount of BTC being transferred) that can be held in a 1MB block, and as Bitcoin became more popular, the network began to get bogged down by the number of blocks it had to create to process to validate all of the transactions taking place.
SegWit solves this issue by increasing the block size so that each one can hold 4 million weight units (WU), up from just 1 million WU with a 1MB block. It also made transactions themselves smaller by segregating the digital signature of each one from the transaction data itself.
As you may have already worked out by now, the implementation of the SegWit protocol greatly reduced the time it takes to validate transactions by allowing significantly more of them to be processed at once, therefore making the network quicker. An original block was able to hold around 1,650 transactions, but a SegWit block can hold around 2,700, depending on their WU.
The change also made Bitcoin’s blockchain more secure by preventing transaction malleability, which is the ability to alter small pieces of information inside each block. Without malleability, bad actors are unable to fill blocks with large amounts (relatively speaking) of fake data in an attempt to carry out a denial-of-service (DoS) attack on the Bitcoin network.
Furthermore, SegWit paved the way for further Bitcoin upgrades that simply wouldn’t have been possible on the original network, such as Taproot, which allows for more efficient and more secure transaction signing, and the Lightning Network, which enables instant and more affordable Bitcoin transactions.
The SegWit protocol was invented by Dr. Pieter Wuille, a Bitcoin developer and the co-founder of Blockstream — a blockchain technology company that specializes in digital security for financial services. It was first rolled out on the Bitcoin network in July 2017 as part of Bitcoin Improvement Proposal (BIP) 91, but wasn’t fully activated until around a month later.
The introduction of SegWit caused Bitcoin’s market value to rise almost 50% in one week, despite many Bitcoin fans being unhappy about its implementation initially, and the number of SegWit transactions quickly grew. By late 2019, more than half of Bitcoin transactions were using the newer protocol, and that figure now stands at around 90% today.
As we touched upon earlier in this guide, it is important to recognize which transaction protocol you should be using when carrying out Bitcoin transfers. There are actually three in total — Bitcoin legacy addresses (P2pKH), SegWit addresses (P2PSH), and Native SegWit addresses (bech32) — which you can read more about in our in-depth guide to wallet addresses.
SegWit addresses are backwards compatible with legacy wallet addresses, which means you should not encounter issues sending BTC from one address type to another. However, not all exchanges or wallet apps support the SegWit (bech32) protocol. It’s important to check first because if you use an unsupported network, your assets could be lost.
The original design of the Bitcoin network could not cope with demand as the cryptocurrency grew more and more popular. It was also holding back some major upgrades. The introduction of SegWit solved this problem by greatly reducing transaction times, increasing security, and allowing for things like Taproot and the Lightning Network.
SegWit was first rolled out on the Bitcoin network in July 2017, but it wasn’t fully activated until late August 2017.
Yes, SegWit is a soft fork, which means it is a change to the original Bitcoin blockchain, as opposed to a brand new one.
SegWit transactions are faster since more transaction data can be grouped together inside a single block, and they’re more secure. SegWit addresses are backwards compatible with legacy Bitcoin addresses, but you’ll need to ensure the exchange or wallet you’re using supports them.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
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