What is Segwit? Segregated Witness Explained Simply

Summary

In this episode of Crypto Whiteboard Tuesday, Nate Martin from 99Bitcoins.com explains Segregated Witness (SegWit), an upgrade to the Bitcoin network activated in August 2017. SegWit addresses Bitcoin's scalability by increasing transaction capacity, moving digital signatures to an extended block, thus allowing more transactions to fit within the 1MB base block. It also solves the transaction malleability issue, ensuring the integrity of transactions for second-layer solutions like the Lightning Network. SegWit blocks, measured by weight rather than size, incentivize miners to include lighter transactions, enhancing efficiency. With almost 50% of Bitcoin transactions being SegWit, it's becoming the new standard, paving the way for further developments like Schnorr Signatures and mass adoption of Bitcoin.

Takeaways

• 🚀 **Segwit Introduction**: Segregated Witness (Segwit) is an upgrade to the Bitcoin network activated in August 2017, introduced by developer Pieter Wuille to address scalability and transaction malleability issues.
• 🔗 **Blockchain Transactions**: Bitcoin transactions are recorded on a blockchain, with blocks containing transactions created approximately every 10 minutes, limited by the 1MB block size.
• 📈 **Scalability Problem**: The 1MB block size limit results in an average of 2700 transactions per block, causing scalability issues and long transaction queues, especially when compared to Visa's 1,700 transactions per second.
• 🔄 **Transaction Malleability**: Bitcoin's code allows digital signatures to be altered without invalidating the transaction, which can affect transaction IDs and cause problems for second-layer solutions like the Lightning Network.
• 🔧 **Segwit Solution**: Segwit solves malleability by moving the digital signature (the witness) outside of the base transaction block, thus preventing signature alteration from affecting transaction IDs.
• 📦 **Block Structure Change**: Segwit introduces a new block structure with a 1MB base transaction block and a 3MB extended block for witness data, effectively increasing block size without a hard fork.
• 🤝 **Backwards Compatibility**: Segwit is a soft fork, allowing both Segwit and non-Segwit blocks to coexist, with legacy nodes accepting only the base block and Segwit nodes accepting both.
• ⚖️ **Block Weight Measurement**: Segwit introduces block weight measurement, which considers the size of the base transaction and the full transaction size, incentivizing miners to include lighter Segwit transactions.
• 💰 **Transaction Fees**: Segwit transactions, being lighter, can fit more in a block, potentially increasing miner's fees and often requiring lower network fees for faster confirmation.
• 📈 **Adoption and Support**: Major wallet brands like Ledger, TREZOR, Electrum, Exodus, and Coinomi have adopted Segwit, with almost 50% of Bitcoin transactions being Segwit transactions.
• 🔄 **Migration to Segwit**: Users with legacy wallets need to create a new Segwit wallet and transfer funds to it, as there is no direct upgrade path from legacy to Segwit wallets.
• ⏭️ **Future Developments**: Segwit is a foundational upgrade that enables further developments like the Lightning Network and Schnorr Signatures, contributing to Bitcoin's readiness for mass adoption.

Q & A

What is Segwit and when was it activated?

Segwit, which stands for Segregated Witness, is an upgrade to the Bitcoin network designed to address scalability and transaction malleability issues. It was activated in August of 2017.

How does Segwit help with Bitcoin's scalability problem?

Segwit helps with scalability by changing the structure of blocks, moving the digital signature (the witness data) outside of the base transaction block into an extended block. This allows more transactions to fit within the 1mb base block, effectively increasing the transaction capacity without altering the block size limit in the protocol.

What is transaction malleability and how does Segwit address it?

Transaction malleability is the ability to alter a transaction's digital signature without invalidating the transaction, which can lead to issues such as changing a transaction's ID. Segwit addresses this by moving the signature outside the base block, so changes to the signature do not affect the transaction ID.

How does the block size debate relate to Segwit?

The block size debate centers around whether to increase the block size to improve transaction throughput. Segwit offers a solution that increases the effective block size to 4mb without a contentious hard fork, by using a 1mb base block with an additional 3mb extension.

What is a soft fork and how does it relate to Segwit?

A soft fork is a type of blockchain upgrade that is backwards compatible, meaning that nodes running the old software can still validate transactions after the fork. Segwit is implemented as a soft fork, allowing both Segwit and non-Segwit nodes to coexist and validate transactions.

How does Segwit's block weight concept benefit miners?

Segwit introduces the concept of block weight, which is calculated per transaction and incentivizes miners to include 'lighter' Segwit transactions. This is because they can fit more transactions in a block, increasing the potential miner's fee if the block is accepted.

What is the average block size with Segwit transactions?

While Segwit theoretically allows for blocks up to 4mb in size, in practice, the average block size that includes Segwit transactions is around 2mb.

How do Segwit and legacy addresses differ in their starting digits?

Segwit addresses start with a '3', while legacy addresses start with a '1'. This distinction helps users and systems differentiate between the two types of addresses.

What is the process for moving funds from a legacy wallet to a Segwit wallet?

To move funds from a legacy wallet to a Segwit wallet, one must create a new Segwit wallet and then transfer all funds to the new wallet's address. There is no direct upgrade path for a legacy wallet to become Segwit-compatible.

Which popular wallets have adopted Segwit?

Major wallet brands such as Ledger, TREZOR, Electrum, Exodus, and Coinomi have adopted Segwit, enhancing their support for Bitcoin transactions.

How does Segwit set the stage for further Bitcoin developments?

Segwit is a foundational upgrade that allows for further developments like the Lightning Network and Schnorr Signatures. It paves the way for Bitcoin to scale and become more efficient, making it more suitable for mass adoption.

What is the significance of the 1mb base transaction block in Segwit?

The 1mb base transaction block in Segwit is significant because it maintains the original block size limit defined in the Bitcoin protocol, allowing more transactions to fit due to the segregated witness data, without requiring a hard fork.