What is SegWit: The Complete Guide on Segregated Witness (2024)

Welcome to another beginner’s guide to crypto! Today, I’m going to be telling you about what is SegWit.

There are hundreds of cryptocurrencies on the market and they each have a set of rules that guide the way they work. This set of rules is called aprotocol. So, what does any of this have to do withSegWit? What isSegWit?

Well, like all computerprograms, cryptocurrencies need to be updated and improved. Bugs and glitches are discovered that need to be fixed. This is what’s happening when your laptop asks you to shut down and update.

When a cryptocurrency needs to be updated or improved, changes have to be made to its protocol.SegWitwas an update made to the Bitcoin protocol last year.

In this guide, I’m going to tell you everything you need to know aboutSegWit. I’m going to tell you whatSegWitis and how it works. I’m also going to tell you what improvements it has made to the Bitcoin network and what these improvements mean for its users.

By the end of this guide, you’ll never have to ask yourself, “What isSegWit?” again.

Let’s begin by looking at whereSegWitcame from and what it was trying to achieve…

The Story of SegWit

Latest Deal Active Right Now:

The idea forSegWitwas first introduced by PieterWuilleat a Bitcoin conference in 2015.Wuilleis a Bitcoin developer and the co-founder ofBlockstream, a software company that specializes in digital security for financial services.

WuillesuggestedSegWitas a solution to a flaw in the Bitcoin protocol. In software development, solutions to flaws are calledpatches. The problem he wanted to fix is calledtransaction malleability. Transaction malleability is anerdy way of saying that Bitcoin can be stolen from users by changing tiny pieces of transaction information. Don’t worry, I’m going to cover all this in more detail in the next section.

Wuille’sSegWitproposal caused a big debate in the Bitcoin community and it was nearly two years before it went live. It was finally activated on August 23,2017. The same patch was applied to theLitecoinprotocol on May 10,2017.

Note: Litecoin is a cryptocurrency whose code is based on the Bitcoin protocol. Because they are very similar, they shared the problem of transaction malleability.

SegWitfixed the transaction malleability problem and also made some other improvements to the Bitcoin protocol possible. However, it still has a lot of critics and not all users of the Bitcoin network have welcomed the changes. Some members of the Bitcoin community disagree withSegWitso much that they’ve created their rival cryptocurrencies!

Before we get into any of that, let’s look more closely at the problem of transaction malleability. So, what is transaction malleability and what isSegWitdoing to stop it?

Transaction malleability is quite complicated. To understand it, you first need to understand how Bitcoin transactions work...

The Fundamentals of Blockchain

Bitcoin is a huge network made up of thousands of computers callednodes.Each node keeps a full record of every Bitcoin transaction that has ever been made. This record is called ablockchain.

Most of the work involved in processing new transactions is done by special nodes calledminers. Users pay miners transaction fees for the work they do. New transactions can only be added to the blockchain after miners have put them into groups of transactions calledblocks.Each block on the Bitcoin blockchain contains 1MB of transaction information.

It should take around10 minutesfor the network to process one block of transactions but it can take a lot longer. The Bitcoin network can process between3-7transactions per second (Tx/s). However, this can slow down a lot when the network is busy.

Now I’m going to use two examples to show you how simple Bitcoin transactions work. The first will be a standard Bitcoin transaction. The second will be a transaction where one user takes advantage of transaction malleability to steal Bitcoin from another user.

Transactions For Beginners

Lucy wants to send10 Bitcoin (BTC) to Jude. To do this, Lucy and Jude need two kinds of information:

• A public address:This is like a Bitcoin email address. A public address is a digital location for Lucy to send Bitcointo. Judehas apublic address toreceiveBitcoin. Public addresses can be seen by the whole network.
• A private key:If public addresses are like email addresses, then private keys are like passwords. They prove that the public addresses - and therefore the Bitcoin itself - belong to Lucy and Jude. Only Lucy can see Lucy'sprivate keyand only Jude can see Jude’s private key.

Let’s see what the transaction looks like on the Bitcoin network...<

Standard Bitcoin Transaction

How does 10BTC get from Lucy to Jude?

1. Lucy broadcasts a request to the network. The request contains Jude’s public address, the amount being sent (10BTC) and a transaction fee for the miners. It also contains Lucy’s private keysignaturewhich she uses to prove that she has 10BTC to send. This signature information is calledwitness data.
2. Miners process the transaction.They put Lucy’s information together with Jude’s andhash it. This means that they turn the information into a line of computer code. This code is called thetransaction ID.
3. The transactionqueues, waiting to be processed.If Lucy has attached a low transaction fee then it could queue for a long time! It’s like ordering food in a restaurant. If you don’t tip the waiter, then it could take a long time for your food to arrive! Lucy can speed the process up by sending the transaction again with a higher fee. The transaction ID is now added to the transaction IDs of other users and encrypted again. This process continues until the limit of 1MB of transaction information is reached and a block is formed.
4. The block is confirmed.The block is broadcastedto the network and if more than half of all nodes agree that the information on it is valid in it can be confirmed and added to the blockchain. Jude receives 10BTC from Lucy.

This is how mostBitcoin transactions happen. Next, I want to show you how transaction malleability can affect transactions and then we can ask, what isSegWitdoing about it?

How Transaction Malleability Works

Using the example again, I’ll show you how transaction malleability can be used by Jude to trick Lucy into sending him 20BTC instead of 10. Here’s how it works…

The transaction malleability flaw in Bitcoin’s code allows Jude to change Lucy’s witness data before the transaction is confirmed. This changes the transaction ID without changing the transaction itself (which is still 10BTC being sent from Lucy to Jude).

When this altered transaction is confirmed by the network, it cancels out the original transaction. Now Jude contacts Lucy to complain that he hasn’t received 10BTC, even though he has!

Lucy checks and sees that the original transaction hasn’t gone through. She now attaches a higher transaction fee and sends it again. This new transaction is processed by the network. Jude receives 10 more Bitcoins!

Lucy, the miners and the rest of the network have no way of knowing that this is happening. Once the transactions are confirmed and added to the blockchain they can’t be changed or deleted. Below is a chart showingwhat a seriousproblem transaction malleability is for the Bitcoin network.

Source: bitcoinmagazine

The transactions effected by transaction malleability are shown in red.

So, what isSegWitand what does it do to solve the problem of transaction malleability?

Patching Transaction Malleability

As I mentioned earlier,SegWitis a patch designed by PieterWuilleto prevent transaction malleability. The way it works is pretty simple. To stop witness data from being used to change transaction IDs,Wuillesuggested removing it from the transaction! Simple, right?

SegWit’sfull name is asegregated witness. Segregate means remove or separate, soSegWitmeans to remove the witness data.

A segregated witness creates asidechainwhere witness data is stored away from the main blockchain. This prevents transaction IDs from being altered by dishonest users like Jude!

The clever thing about BitcoinSegWitis that it’sbackward compatible.This means that nodes that are updated with theSegWitBitcoin protocol can still work with nodes that haven’t been updated. This kind of update is called asoft fork. Updates that aren’t backward compatible are calledhard forks.Hard forks can divide networks and lead to new cryptocurrencies being created.

PieterWuillewantedSegWitto be backward compatible, and therefore, a soft-fork update. To do this, he needed to design it so that witness data was still recorded on the main blockchain. The solution he found was to encrypt all the witness data of a block on theSegWitsidechain and store thisroot codeon the main blockchain. This allowed BitcoinSegWitto patch transaction malleability without becoming a hard-fork update.

Now you know how segregated witness prevents transaction malleability,but the story ofSegWitBitcoin doesn’t end there.SegWithas affected the Bitcoin network in ways that PieterWuilledidn’t even think of when he created it!

Next, I’m going to tell you aboutscalabilityand thelightning network.I’ll begin with scalability...

So, what isSegWitscalability?

Bitcoin SegWitScalability

First, let me explain what scalability is. Scalability is the ability of a network to process huge amounts of transactions without transaction speeds going down. If a network is scalable, it will be able to process transactions as fast, or even faster, as it gets bigger. Unfortunately, most cryptocurrencies process transactionsslowerthe bigger they get.

Cryptocurrencies have a scalability problem because transactions are processed byconsensus. As I mentioned earlier, more than half the nodes on the Bitcoin network need to agree that a transaction is valid before it can be added to the blockchain. The more nodes there are on the network, the longer it takes to reach an agreement orconsensus.

The Bitcoin community has been debating different ways to scale the network for a long time. The problem gets worse as the platform becomes more popular so time is running out to find a solution.

When PieterWuillecreated BitcoinSegWithe accidentally improved the network’s scalability as well! Witness data used to take up65%of every Bitcoin block. By removing witness data,SegWitBitcoin blocks now have room for much more transaction information.

Each block now has a setblock weightwhich is capped at 4MB. A block’s weight is a combination of the 1MB of information stored on the main blockchain and the witness data stored on a sidechain. A segregated witness allows the network to process more transactions without changing the overall Bitcoin blockchain size.

So, if someone asks you, “what isSegWitscalability?” you can tell them that it’s a way of processing more transactions on the Bitcoin network. It makes the networklighterby removing witness data from transactions without affecting the Bitcoin blockchain size.

Now, I want to tell you about another exciting development thatSegWitis making possible. What isSegWitbeing used for now?

The Lightning Network

The lightning network is another solution to the Bitcoin scalability problem and it wouldn’t work without a segregated witness.
The lightning network allows users to set up payment channels formicropayments. Let’suse Lucy and Jude for another example:

Jude works for Lucy. She pays him 1BTC per day. Rather than processing the transaction on the main blockchain, Lucy and Jude set up a private payment channel where Lucy can send Bitcoin directly to Jude. She sends him a micropayment of 1BTC per day. Each micropayment needs to be signed by both Lucy and Jude. They are calledmulti-signature transactionsfor this reason.

Jude works for Lucy for ten days. At the end of the ten days, Lucy and Jude close the payment channel. At this point, all the micropayments are broadcast to the network as one transaction for 10BTC.

Payment channels like these form the basis of a lightning network of thousands of micropayments taking place away from the main blockchain. Transactions are only added to the main blockchain when users close the payment channel. So, what isSegWitdoing to make this possible?

Micropayments areunconfirmedtransactions that only become valid when the payment channel is closed and the total balance of transactions is processed by the network. Without BitcoinSegWit, users could alter transaction IDs in multi-signature transactions using transaction malleability. This would mean chaos for the system and leave it completely unworkable.

You now know whatSegWitis, how it works and what it means for the Bitcoin network. Before I finish, I’ll give you a quick recap of what’s great aboutSegWit. I’ll also tell you about some of the criticism it’s had and some of the issues it’s caused...

What is SegWit: The Pros

PROs

What is SegWit: The Cons

CONs

Now you’ve got all the facts, you can answer “What isSegWit?” for yourself. Before I go, I want to share a few closing remarks with you...

Conclusion

When PieterWuilledesignedSegWit, he wanted to fix the problems that transaction malleability was causing. ButSegWitdid much more than that, itcreated a massive discussion about the future of the Bitcoin platform itself. Bitcoin is nearly ten years old. It’s still the biggest cryptocurrency in the world but some are starting to question whether it’sthe best.

There are hundreds of new blockchain projects offering some of the most advanced crypto techs ever seen. Some seeSegWitBitcoin as a positive change for the network. However, others see it as a symbol of Bitcoin’s limitations.

TheSegWitdebate continues throughout the Bitcoin community, and now you know enough to have your say. What isSegwitto you? Is it an exciting new development that will take Bitcoin into the future? Or is it a temporary solution to the much bigger problems that the Bitcoin network faces? Think about it, and I’ll see you next time!

The content published on this website is not aimed to give any kind of financial, investment, trading, or any other form of advice. BitDegree.org does not endorse or suggest you to buy, sell or hold any kind of cryptocurrency. Before making financial investment decisions, do consult your financial advisor.