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.

Outlines

00:00

🚀 Introduction to Segwit and its Purpose

The first paragraph introduces the concept of Segregated Witness (Segwit), an upgrade to the Bitcoin network activated in August 2017, designed to address Bitcoin's scalability and transaction malleability issues. It explains the limitations of the 1mb block size and how Segwit, proposed by developer Pieter Wuille, aims to increase transaction capacity to facilitate mass adoption. The paragraph also sets the stage for a deeper dive into how Segwit operates and its benefits.

05:02

🔍 How Segwit Works and its Impact on Bitcoin Transactions

This paragraph delves into the technical workings of Segwit. It describes how Segwit restructures blocks to separate witness data from the base transaction data, effectively increasing the capacity of the blockchain without violating the 1mb block size protocol. The explanation covers how this change reduces transaction malleability by keeping the transaction ID stable even if the signature changes. Additionally, it discusses the concept of block weight in Segwit, which incentivizes miners to include more Segwit transactions, leading to a more efficient and cost-effective network. The paragraph concludes by noting the growing adoption of Segwit in popular wallets and the need to create a new Segwit wallet for those transitioning from legacy wallets.

10:04

📈 Segwit's Role in Bitcoin's Scalability and Future Developments

The final paragraph emphasizes Segwit's significance as a foundational upgrade for Bitcoin, enabling smaller transaction sizes and enhanced security against malleability issues. It invites viewers to ask questions in the comments and encourages engagement with the channel through likes and subscriptions. The speaker, Nate Martin from 99Bitcoins.com, wraps up the episode by highlighting Segwit as a precursor to further innovations like the Lightning Network and Schnorr Signatures, positioning it as a crucial step towards Bitcoin's scalability and mainstream acceptance.

Keywords

💡Segwit

Segwit, which stands for Segregated Witness, is a significant upgrade to the Bitcoin protocol that was activated in August 2017. It aims to address Bitcoin's scalability issues by changing the way transactions are structured on the blockchain. By separating the witness data (which includes the digital signature) from the base transaction data, Segwit effectively increases the number of transactions that can fit into a block, thereby enhancing the network's capacity to handle more transactions. This is crucial for Bitcoin to scale and potentially achieve mass adoption.

💡Scalability

Scalability refers to the ability of a system, such as Bitcoin, to handle an increasing amount of work, or in this case, transactions. The video discusses how Bitcoin's scalability is limited by the 1MB block size, which restricts the number of transactions that can be processed. Segwit is presented as a solution to this problem by allowing more transactions to be included in a block, thus improving scalability and bringing Bitcoin closer to handling a volume of transactions that could support mass adoption.

💡Transaction Malleability

Transaction malleability is a vulnerability in the Bitcoin protocol where the digital signature of a transaction can be altered without invalidating the transaction. This can cause issues, such as changing the transaction ID (hash), which can affect the validity of subsequent transactions that rely on the original ID. The video explains how Segwit solves this problem by moving the digital signature to a separate 'witness' data structure, preventing the alteration of the transaction ID.

💡Blockchain

The blockchain is an immutable ledger where Bitcoin transactions are recorded. It consists of blocks of transactions that are linked together in a chain, ensuring the chronological order and integrity of transactions. In the context of the video, the blockchain is the technology that Segwit aims to optimize by improving how transactions are bundled and recorded, thus addressing the scalability issue.

💡Block Size

The block size refers to the maximum amount of data that can be stored in a single block on the Bitcoin blockchain. Initially, Bitcoin's protocol limited the block size to 1MB, which restricted the number of transactions that could be processed at a time. Segwit introduces a new block structure that effectively increases the block size without violating the protocol, allowing more transactions to be processed and enhancing the network's scalability.

💡Soft Fork

A soft fork is a type of change to a blockchain that maintains compatibility with previous versions of the system. In the video, it is mentioned that Segwit is implemented as a soft fork, allowing both Segwit and non-Segwit nodes to coexist on the network. This means that nodes do not need to immediately upgrade to support Segwit, and the network can continue to function while the transition occurs.

💡Block Weight

Block weight is a concept introduced with Segwit that measures the size of a transaction based on its base data and full data, including the witness data. It is calculated as the size of the base transaction (excluding witness data) multiplied by 3 plus the full transaction size. This new measurement allows for a more efficient use of block space, as it incentivizes miners to include transactions with smaller witness data, which effectively reduces the transaction's weight and allows for more transactions to fit within a block.

💡Digital Signature

A digital signature is a mathematical scheme used to verify the authenticity and integrity of a digital message or transaction. In the context of Bitcoin transactions, as explained in the video, the digital signature is part of the transaction data that confirms the sender's eligibility to spend the bitcoins. Segwit addresses the issue of transaction malleability by moving the digital signature to the 'witness' data, which is separate from the base transaction block.

💡Lightning Network

The Lightning Network is a second-layer solution built on top of the Bitcoin blockchain, designed to enable faster and more efficient transactions. The video mentions that the Lightning Network relies on the underlying blockchain's integrity, which is why addressing transaction malleability through Segwit is crucial for its functionality. Segwit's ability to secure transactions makes it a foundational upgrade for supporting more advanced layer-two solutions like the Lightning Network.

💡Legacy Addresses

Legacy addresses refer to the older format of Bitcoin addresses that begin with the number '1'. The video contrasts these with Segwit addresses, which start with a '3'. The shift to Segwit addresses is part of the upgrade that allows for more efficient transaction processing. Users with legacy wallets who wish to take advantage of Segwit's benefits would need to create a new Segwit wallet and transfer their funds to the new address.

💡Miner's Fee

The miner's fee is the transaction fee paid to Bitcoin miners for including a transaction in a block. The video explains that with Segwit, miners are incentivized to prioritize 'lighter' transactions (those with smaller witness data) because they can fit more of these transactions in a block, which increases the potential for miner's fees. This economic incentive helps to drive the adoption of Segwit transactions and contributes to the network's ability to scale.

Highlights

Segwit is an upgrade to the Bitcoin network activated in August 2017, aiming to solve scalability and transaction malleability issues.

Bitcoin transactions are limited by a 1mb block size, causing scalability problems when many transactions occur simultaneously.

Segwit increases transaction capacity by moving the digital signature, known as 'the witness,' outside the base transaction block.

Transaction malleability is a problem where the digital signature of a transaction can be altered without invalidating the transaction.

Segwit prevents malleability by ensuring a signature change does not affect the transaction ID.

Segwit blocks are structured as a 1mb base transaction block plus an additional 3mb extended block for witness data.

Segwit is a soft fork, maintaining backward compatibility with legacy nodes that only receive the base transaction block.

Segwit transactions are measured by weight, not size, incentivizing miners to include more lightweight transactions in a block.

The average block size with Segwit transactions is around 2mb, with almost 50% of all Bitcoin transactions being Segwit.

Legacy transactions, being larger, require higher network fees for faster confirmation.

Popular wallets and exchanges are increasingly supporting Segwit, with addresses starting with a '3'.

Moving to a Segwit wallet from a legacy wallet requires creating a new Segwit address and transferring funds.

Segwit is the foundation for further Bitcoin developments like the Lightning Network and Schnorr Signatures.

Segwit is expected to become the standard for Bitcoin transactions as more wallets adopt it.

Segwit addresses the scalability problem by allowing more transactions to be processed, thus facilitating mass adoption.

The introduction of Segwit is a fundamental change that enhances Bitcoin's transaction efficiency and security.

Transcripts

What is Segwit?

Will it truly allow for Bitcoin to scale for mass adoption?

And how does it even work?

Well stick around,

in this episode of Crypto whiteboard Tuesday

we’ll answer these questions and more.

Hi, I’m Nate Martin from 99Bitcoins.com

and welcome to Crypto Whiteboard Tuesday

where we take complex cryptocurrency topics,

break them down

and translate them into plain English.

Before we begin, don’t forget to subscribe to the channel

and click the bell so you’ll immediately get notified

when a new video comes out.

Today’s topic is Segregated Witness, or Segwit for short.

Segwit is an upgrade to the Bitcoin network

that was activated in August of 2017.

It was first introduced by Developer Pieter Wiulle

at the Scaling Bitcoin conference in December 2015.

Segwit aims to solve several issues:

one of which is Bitcoin’s scalability.

Bitcoin transactions are written on a Blockchain,

an immutable ledger

on which transactions are bundled together into blocks

that are chained one to the other, in order to determine their order.

A new block is created roughly every 10 minutes.

Additionally,

Bitcoin’s protocol limits the capacity of a block to 1mb,

which limits a Bitcoin block to around 2700 transactions on average.

This creates a problem

when a lot of people are trying to send Bitcoins simultaneously

as the queue of transactions waiting to enter the blockchain

gets longer and longer..

While Visa can process 1,700 transactions per second,

Bitcoin can process only 4,

not nearly a scale that could handle mass adoption.

In order for Bitcoin to truly become usable on a worldwide scale,

it needs to find a way to increase its transaction capacity.

Another issue Segwit addresses is transaction malleability.

Every Bitcoin transaction has 3 parts -

who sent it (also known as input), who receives it (output),

and a digital signature

that verifies that the sender is eligible to send the coins.

It turns out that Bitcoin’s code allows digital signatures to be altered

while a transaction is still waiting to get confirmed.

The signature alteration can be done in such a way that

if you run a mathematical check on it, it is still valid according to the network.

But if you run a hashing algorithm on it,

it gives a different result.

Let me explain with an example:

For the sake of simplicity

let’s say that the signature value was “3”,

but instead of “3” I change it to “03” or “3+7-7”.

While mathematically, the values are all the same,

so it’s still a valid signature,

if I hash these different versions I will get different results,

since hashing depends on how you write the value

and not just the value itself.

Since the hash is the transaction’s id in the blockchain,

this means I can effectively change any unconfirmed transaction’s id

to a different id and it will still be valid.

Creating a new transaction id for an existing transaction

can be problematic for a number of reasons:

First, if you want to build second layer solutions

on top of the Bitcoin network, like the Lightning Network,

you need to make sure no one can alter the first layer

since the one relies on the other.

If you want to learn more about the Lightning Network

make sure to catch our episode about it as well.

Second, altering transaction ids can cause issues

if you’re spending or accepting unconfirmed funds.

Let’s go through another example:

Alice pays Bob in transaction X which is currently unconfirmed.

Bob uses these unconfirmed funds

to pay for a product online from Charlie (transaction Y).

Meanwhile, Charlie sends Bob his product

before waiting for confirmation on transaction Y.

After receiving his product,

Bob does some technical tinkering, and maliciously changes,

or malleates, Alice’s payment

so that her transaction, X gets confirmed

but with a different transaction id.

Transaction Y, which is what Bob sent to Charlie,

is now invalid

since it relies on transaction X’s original transaction id

that now no longer exists.

So Charlie won’t get paid

even though he’s already delivered the goods to Bob.

Bad Bob...

While scalability and malleability

are the two most burning issues that Segwit addresses,

there are a variety of other technical issues

that Segwit tackles

that don’t necessarily affect the end user directly.

Now that you know what Segwit is,

let’s talk a bit about how it actually works.

Segregated Witness is a proposed change

to how blocks are structured.

Non segwit blocks, also known as legacy blocks,

have a total of 1mb space for all of the block data:

inputs, outputs, signatures and additional scripts.

Segwit blocks, on the other hand,

are in fact large 4mb blocks that consist of a base transaction block

and an extended block.

So contrary to popular opinion, Segwit is indeed a block size increase.

Segwit blocks move the digital signature

and other data known as “the witness” outside of the base transaction block.

The witness data will still be transmitted,

but it is placed inside the extended block.

So the base transaction block includes the information about the sender

and the receiver

and the witness data is left blank and doesn’t take up any more space.

This allows for more transactions to fit inside

the 1mb base transaction block.

The extended block (the additional 3mb)

include all of the witness data that isn’t mandatory

in the base transaction block.

The new block format Segwit introduces

achieves two major goals:

First, it moves the digital signature outside of the base transaction block.

This way,

if someone changes the signature on the transaction,

it won’t affect the transaction id.

This in effect solves the transaction malleability issue....

you know...Bob.

Second, it shrinks down the base transaction data.

Since the witness data takes up to 65% of the transaction size,

moving it outside of the base transaction block

allows more transactions to fit inside that 1mb block.

I know what you’re probably thinking.

If Segwit is in fact a block size increase,

why not just increase the block size to 4mb in the first place?

Why all of this hassle and block size debate

if the end result is in fact bigger blocks.

The answer is really quite simple -

developers wanted to avoid a contentious hard fork

in the Bitcoin network.

You see, Bitcoin’s protocol specifically states that

blocks can’t exceed 1mb.

So, developers had to find a solution

that will allow the network to accept both Segwit and Non Segwit blocks

if a hard fork were to be avoided.

The solution of a 1mb block with an “extension” of another 3mb

is something that is still acceptable under the existing protocol.

Legacy nodes receive only the 1mb base transaction block

without the extended block.

They still consider them valid.

Segwit nodes receive both the base and extended block

(up to 4mb in total)

and can validate the transactions in full.

This backwards compatibility is also known as a soft fork.

This approach is a lot less risky

since it doesn’t require nodes to update their software to support Segwit.

It means that even if it takes years for all of the nodes to upgrade,

the network will still function.

Now let’s move on to how Segwit blocks are measured by miners.

While legacy blocks are measured in size,

Segwit blocks are measured in weight.

Block Weight is a new concept introduced in Segwit,

and it’s calculated on a per-transaction basis.

Each transaction has a “weight” which is defined this way:

The size of your Base Tx

(meaning that which doesn’t include the witness data) *3

+ the Full Tx size, that = your transaction weight.

Legacy transactions

don’t have the ability to strip away the witness data from the base transaction,

so their weight will always be 4 times the tx size.

For example, a legacy TX of 1000 bytes

will have a weight of 1000*3 + 1000 = 4000.

Segwit transactions, on the other hand,

are going to have a weight of less than 4 times the tx size.

For example,

a 1200 byte Segwit transaction comprised of 400 bytes of witness data

will have a weight of

(1200 (the total transaction size)-400 (the size of the witness data))

leaving the base transaction size of 800, times 3,

making 2400,

add the total transaction size of 1200, and that = 3600.

In short,

the larger the size of the witness data, the lighter the tx weight will be.

This incentivizes miners to prefer ‘lighter’ Segwit transactions

over ‘heavier’ ones,

since they can fit more of them inside a base transaction block,

which increases the potential miner’s fee,

should that block be accepted and confirmed.

While in theory Segwit transactions can create a block up to 4mb in size,

in practice the average block size that includes Segwit transactions

is around 2mb.

Today, almost 50% of all Bitcoin transactions

are Segwit transactions.

Since legacy transactions are larger in size,

they require higher network fees to get confirmed faster.

And finally,

Segwit addresses start with a “3” while legacy addresses start with a “1”.

Thanks to its advantages,

more and more popular wallets and exchanges support Segwit.

Ledger, TREZOR, Electrum, Exodus and Coinomi

are just some of the major wallet brands

that have already adopted Segwit.

It’s important to note that if you have a legacy wallet

and you want to move to a Segwit wallet

you will need to create a brand new Segwit wallet

and move all of your funds to its address.

There’s no way to just upgrade your existing legacy wallet

to work with Segwit.

Segwit is the first of many upgrades

that will gradually allow for Bitcoin to scale for mass adoption.

It’s a fundamental change that will allow further developments

down the road

like the Lightning Network, Schnorr Signatures and more.

As more and more wallets adopt Segwit,

it will soon become the standard for any Bitcoin transaction.

Well, that’s it for today’s episode of Crypto Whiteboard Tuesday.

Hopefully by now you understand what Segwit is -

An upgrade to the Bitcoin protocol

that Segregates the witness data from the base transaction data,

hence achieving a smaller transaction size,

securing transactions from malleability issues and more.

You may still have some questions.

If so, just leave them in the comment section below.

And if you’re watching this video on YouTube,

and enjoy what you’ve seen,

don’t forget to hit the like button.

Then make sure to subscribe to the channel

and click that bell so that you’ll be notified

as soon as we post new episodes.

Thanks for watching me here at the Whiteboard.

For 99bitcoins.com, I’m Nate Martin,

and I’ll see you…in a bit.