What is Segwit? Bitcoin's Scalability Upgrade Explained

SegWit was a protocol upgrade implemented in the Bitcoin network in 2017. Its primary purpose was to address the scalability issues that emerged as Bitcoin's user base and transaction volume grew exponentially. These issues led to longer transaction times and higher fees and hindered the development of advanced features like the Lightning Network.

The primary goal of SegWit was to optimize the way transaction data is stored within Bitcoin blocks, thereby allowing more transactions to be processed in each block without increasing the block size itself. This optimization not only sought to increase the transaction capacity of the Bitcoin network but also mitigate transaction malleability, an issue that can hinder the development of advanced features like the Lightning Network.

As discussed, the history of SegWit and The Block Size Wars be traced back to the early days of Bitcoin when the network began to experience growing pains due to the rapid increase in transaction volume. As a result, the limited block size of 1MB, initially intended as a temporary measure to prevent spam transactions, became a point of contention among developers and the wider Bitcoin community.

Throughout the years, various proposals were put forth to address the block size issue, such as Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited, which sought to increase the block size limit. However, these proposals needed to gain more consensus to be implemented. In 2015, Bitcoin developer Pieter Wuille introduced the concept of Segregated Witness, or SegWit, which aimed to increase transaction capacity without directly increasing the block size. SegWit sparked extensive debates within the Bitcoin community, with some embracing the innovative solution, while others continued to push for a block size increase.

Two primary factions emerged:

1. Those advocating for a block size increase (big-blockers)
2. Those in favor of finding alternative solutions to improve scalability without increasing the block size (small-blockers).

The big-blockers argued that a simple increase in block size would accommodate the rising transaction volume and reduce fees. In contrast, the small-blockers were concerned that larger blocks could lead to greater centralization, as increased storage and processing requirements could push smaller miners and nodes out of the ecosystem.

The block size wars peaked in 2017 with the activation of SegWit on the Bitcoin network and the subsequent creation of Bitcoin Cash, a hard fork of Bitcoin that increased the block size to 8MB. The split highlighted the deep divisions within the community regarding the best approach to scaling the network. Since then, SegWit has been adopted by an increasing number of wallets and service providers, and its benefits, such as lower transaction fees and improved confirmation times, have become more pronounced. Meanwhile, the block size debate has continued, albeit less intensely, as the focus has shifted toward developing second-layer solutions like the Lightning Network and other potential protocol upgrades that could further improve Bitcoin's scalability and efficiency.

To understand SegWit's inner workings, knowing how Bitcoin transactions are structured is essential. Traditional Bitcoin transactions consist of two main parts: inputs and outputs. Inputs refer to the source of the bitcoins (the sender's address), while outputs designate the recipient's address. In a standard transaction, the input contains the signature, or "witness" data, which is used to verify that the sender has the necessary funds and the right to spend them.

In the original Bitcoin protocol, the witness data was included within the transaction itself. The size of the witness data varies, but it can be quite large, taking up a substantial portion of the transaction size. As a result, the limited block size of 1MB imposed a constraint on the number of transactions that could be included in a block.

SegWit, as the name suggests, segregates the witness data from the main transaction data. Instead of being included directly within the transaction, the witness data is stored separately in an extended block, called a "witness block." This separation enables more transactions to fit within a block without increasing the block size. In technical terms, SegWit introduces a new concept called "block weight," which combines the original block size and the segregated Witness data. The maximum block weight is set to 4 million weight units, with a 1MB block size limit still in place.

Critics of SegWit argue that it is a temporary solution to Bitcoin's scalability problem and that a block size increase will eventually be necessary. However, proponents of SegWit contend that with continued optimization and the development of second-layer solutions, the need for a block size increase can be delayed or even avoided entirely. Furthermore, increasing the block size could lead to centralization issues, as larger blocks require more storage and processing power, potentially pricing out smaller miners and nodes.

Another criticism is that SegWit adoption by wallets and service providers was initially slow, leading to a lower-than-expected impact on transaction capacity. However, SegWit adoption has since increased, and as more industry players support it, the network benefits continue to grow. Additionally, the development of new wallet software and improvements in user interfaces have made it easier for users to take advantage of SegWit's features.

Since its introduction, SegWit has positively impacted the Bitcoin network. Transaction fees have decreased, confirmation times have improved, and the network's overall capacity has increased. Additionally, SegWit has paved the way for developing the Lightning Network, a second-layer solution that enables instant, low-cost Bitcoin transactions. The Lightning Network operates on the Bitcoin blockchain, leveraging SegWit's malleability fix to facilitate secure off-chain transactions.

SegWit has also been adopted by other cryptocurrencies, such as Litecoin and Vertcoin, showcasing its versatility and effectiveness as a scaling solution. The adoption of SegWit by these cryptocurrencies has led to similar improvements in transaction capacity, fees, and confirmation times.