For Bitcoin's (BTC) core developers, 2017 was a contentious time. As BTC gained mainstream attention following a massive rally, issues such as high transaction fees, network congestion, and slow confirmation speeds reared their ugly heads. More people than ever before were using BTC, but their experience of transferring their virtual coins wasn’t the smoothest.
These pain points highlighted the need for Bitcoin scalability for the development community, but everyone had a different solution to this crisis. Despite many arguments and rifts during this uncertain time, one protocol emerged as the leading solution: Segregated Witness (SegWit).
Although SegWit's implementation didn't solve Bitcoin scalability, it significantly altered the way BTC operated. Let’s discover what SegWit is, how it works, and how it laid the groundwork for Bitcoin's future development.
What is SegWit?
Developer Pieter Wuille first introduced SegWit at 2015's Scaling Bitcoin conference, and supporters of this idea drew formal designs for SegWit in three Bitcoin Improvement Proposals (BIPs): 91, 141, and 148. After years of debate within the crypto community, Bitcoin developers implemented SegWit in August 2017, and SegWit is activated to this day.
SegWit is a soft fork upgrade to the Bitcoin Network that changed BTC transaction data stored on Bitcoin’s digital payment ledger. Unlike hard fork upgrades, a soft fork is backward-compatible, meaning nodes already on a cryptocurrency's protocol don't need to update their software to continue validating BTC transactions.
What's the purpose of SegWit?
SegWit's main goal was to improve Bitcoin's scalability efforts without creating a new blockchain through a hard fork. As Bitcoin's user base grew, issues such as long processing times and high network fees became major roadblocks to mass adoption. If BTC were to become a viable mainstream payment option, developers needed a way to increase its average throughput of seven transactions per second (TPS) to compete with altcoins and traditional payment options like Visa, Mastercard, and PayPal.
One proposed solution was to increase Bitcoin's data capacity per block from the one megabyte (MB) standard, but this seemingly simple fix went against Bitcoin's core design. If developers increased the MB size per block, they'd force every node on the current BTC blockchain to shift to a new network (i.e., a hard fork).
The SegWit protocol aimed to prevent splintering the Bitcoin community by respecting the 1 MB limit and rearranging data within each block for peak efficiency. SegWit's data storage update also allowed layer-2 protocols—particularly the Lightning Network—to build on top of Bitcon's blockchain and introduce innovative scalability initiatives.
How does SegWit work?
To improve Bitcoin's scalability without introducing a block size increase, developers turned their attention to a software bug called transaction malleability. Although it didn't threaten confirmed Bitcoin transaction data, the bug made it possible for users to alter the unique identifier associated with each BTC transaction (aka the transaction ID). This issue is more of a nuisance than a major security threat because there's still no way to rewrite confirmed BTC transfer data, but it hindered scalability initiatives. With this bug in BTC's system, projects and exchanges couldn't use transaction IDs from unconfirmed transactions as a basis to speed up payment processing.
To reduce transaction malleability and increase total BTC transfers per block, SegWit developers introduced a concept called block weight to measure data capacity. Unlike the inflexible 1 MB pre-SegWit block size, block weight assigns different weight units using the following formula:
Block weight = base transaction size * 3 + total transaction size
SegWit segregates the witness data—or the cryptographic signatures BTC traders use to authenticate their private keys—from the base transaction information, such as the sender (input) and receiver (output). While this new system technically increases Bitcoin's block capacity to 4 MB, it maintains the essential 1 MB standard for the base data because the witness portion of each transaction is now off-chain.
Today, only nodes that upgrade to SegWit's system see the witness confirmations, while those that remain on the legacy Bitcoin Network assume the validity of witness data and see the 1 MB of base transaction details. Splitting this information in each block allows more room to squeeze extra transfers into the base transaction data, easing network congestion.
Why is SegWit controversial?
SegWit aimed at scaling the Bitcoin blockchain while preserving a close-knit network, but it inadvertently created sharp divisions within the BTC community. One primary issue among many miners and developers was SegWit’s insistence on maintaining the 1 MB limit for transaction data rather than expanding Bitcon's block size with a hard fork upgrade. According to this argument, the Bitcoin Network can't scale efficiently if it doesn't adopt larger block sizes to handle higher transaction volumes from a global audience. Bitcoin developers in support of bigger blocks eventually left the Bitcoin blockchain to launch the hard fork Bitcoin Cash (BCH) with 8 MB block sizes (now 32 MB per block) and later Bitcoin SV (BSV).
Beyond the block size debate, some critics raised questions over new security concerns SegWit brought to the Bitcoin Network. For example, SegWit introduced a new script versioning system, making it easier for developers to introduce soft fork upgrades to Bitcoin's code, which some argued introduced unforeseen code vulnerabilities to the blockchain. Some critics also argued fixing transaction malleability by removing witness data opened the door for threats or manipulation from external scaling solutions and third-party services.
Are all Bitcoin wallets SegWit wallets?
Despite SegWit's successful implementation, not all Bitcoin nodes or crypto wallets integrate with this updated network. If traders want to take advantage of SegWit's efficiency enhancements, they must carefully consider the opening phrase in their Bitcoin wallet's public address.
A Bitcoin SegWit address either starts with a bc1 or 3, but non-SegWit (aka Legacy) Bitcoin addresses start with a 1. The bc1 format is also called the native SegWit or bech32 address and offers users maximum space efficiency and the most human-readable addresses. Bitcoin wallets with a 3, however, are Pay-to-Script-Hash (P2SH) addresses and tend to be easier for Legacy wallets to interpret because they wrap SegWit's new script in P2SH script.
There have been instances where older Legacy wallets didn't understand the script in bc1 addresses, but many of today's hardware and software wallets offer SegWit compatibility. The biggest difference between using Legacy and SegWit wallets is the latter typically has higher transaction fees and slower confirmation speeds. But to be extra safe, crypto traders often double-check whether their sending and receiving BTC addresses work with bech32 (if they use native SegWit to send crypto).
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