SegWit, Explained

What is SegWit?

SegWit — or Segregated Witness — is the name given to a Bitcoin (BTC) protocol upgrade, which was implemented on Aug. 23, 2017.

As in any decentralized blockchain, if Bitcoin’s algorithm needs updating, it’s up to the Bitcoin developers and contributors to agree on how and when to make changes together. Completed in this way, the SegWit protocol upgrade was designed to help Bitcoin scale and fix some bugs that represented a risk to its trustless characteristic. SegWit is most known for the way it updates how data is stored on Bitcoin’s blockchain.

Protocol updates like SegWit are an occasional reality for decentralized projects like Bitcoin and are unique to the blockchain space. For a centralized financial product, if the math behind it needs tweaking, an administrator or authority can simply make a unilateral change. Bitcoin, which exists because people support it remotely from around the world, must instead fork in new directions when enough users agree to update their software in the same manner.

What’s a fork, and what did SegWit’s fork do?

A soft fork is a blockchain update made without splitting the chain in two, and SegWit’s increased the number of transactions in any Bitcoin block.

A fork is basically a modification made to open-source code. It introduces deviations to how the underlying project works from that point on, and they can be either soft forks or hard forks. Hard forks force a blockchain to be split in two by requiring participants to flat out reject blocks that aren’t compatible with the new software: The new chain is separate from the old. SegWit was a soft fork, meaning that there would still be a single Bitcoin blockchain to accept blocks from users who had or hadn’t yet enabled SegWit in their software.

SegWit fixed an issue called transaction malleability, which enabled BTC transaction data to be changed before the network processed these transactions. This would’ve created a bookkeeping nightmare. By allowing signature (i.e., “witness”) information to be stored outside of (i.e., “segregated” from) a block of relevant transactions yet still verify them, SegWit allows Bitcoin to keep the integrity of transactions while also packing more of them into any single 1 megabyte block. The result is a faster and safer Bitcoin.

Why is SegWit adoption still incomplete?

SegWit hasn’t been fully adopted by all Bitcoin network participants because it isn’t mandatory, but also due to different incentives between users in the ecosystem. 

Despite the benefits of SegWit, not all participants in the Bitcoin network have implemented it. To understand why requires familiarity with the many roles that people play in the Bitcoin ecosystem and how sometimes the incentives behind them contradict one another. 

For example, Bitcoin doesn’t simply “upgrade” — it relies on wallets, exchanges and companies using it to upgrade themselves and push changes to the network accordingly. With no one mandating SegWit adoption, it’s up to engineering teams to nudge their organizations in the right direction, and this doesn’t always turn out as expected.

Billions were already behind Bitcoin by the time SegWit surfaced, so corporate bureaucracy saw only a small fraction of these companies act with any agility. The final decision on whether to “rock the boat” with new software updates and economics or to keep the status quo is in the hands of reluctant executives and not enthusiasts. Another misaligned incentive is that of the miners, who preferred to use AsicBoost firmware that was incompatible with SegWit but allegedly helped them to verify transactions up to 20% faster.

Will SegWit succeed?

As the Bitcoin price rises and the space gets busier, users are gravitating toward more efficient SegWit-enabled solutions, forcing companies to adopt.

Now that Bitcoin is slowly recovering from its 2018-2019 crash, the fees that users pay to transact are rising as well. Using SegWit-enabled wallets is preferable because the blocks of transactions processed by miners serving these wallets have a higher weight (i.e., density of transactions), resulting in speed and cost-effectiveness. The user migration to these SegWit wallets and tools has quickly accelerated. Since this time last year, SegWit usage has increased from 39% to over 50.5% 

No one wants to pay $5 to send a Bitcoin payment when they paid $0.40 for the same payment just six months ago. SegWit support is therefore a valued feature to look for among the larger variety of wallets and exchanges available. With more transactions on the Bitcoin blockchain becoming SegWit-enabled, using AsicBoost firmware or filtering out these transactions is no longer a profitable strategy for miners.

Are there downsides to SegWit?

SegWit is associated with Bitcoin and its core principles, so its strengths and weaknesses will vary depending on who is observing it.

SegWit’s ability to give blocks more weight, or transaction density, relies on the idea that some blockchain data will be kept off the original chain, which is instead used as a sort of reference or index. Some believe that offloading data from the blockchain is already a failure, as it’s like admitting that blockchain alone can’t function. 

From this perspective, SegWit itself is a weakness infecting Bitcoin, and that’s why rather than implement SegWit, a piece of the community hard forked into a new blockchain called Bitcoin Cash in 2017.

Bitcoin Cash is essentially legacy Bitcoin before SegWit, and its scaling strategy is simply to increase the block size and keep all data on-chain. This is a decentralization strategy opposite that of the Bitcoin Core group, which sees SegWit as the first stack atop a multilayered blockchain. 

There are countless more ideas that riff off Bitcoin or Bitcoin Cash, or take a new tack. SegWit is simply one step in what the largest developer group of the largest cryptocurrency believes is the right path.