Segregated Witness (SegWit) is a significant upgrade that was introduced to the Bitcoin and Litecoin blockchains to enhance transaction efficiency, scalability, and security. It separates signature data from transaction data to effectively increase the block weight limit without changing the actual block size. 

Before we get further into the topic, you must understand that SegWit debuted on Bitcoin in August 2017 to address the various issues curtailing its blockchain such as transaction malleability and limitations imposed by the block size, which led to delays and high transaction costs for users. 

Introduction To SegWit

The Bitcoin network has been operational without any notable incidents for nearly two decades. Bitcoin blocks are created about every 10 minutes and they are constrained to a maximum size of one megabyte (1 MB). This restriction means only a limited number of transactions can be added to a block. 

Initially, when Bitcoin was launched, there was no explicit block size limit, but a 1MB hard cap to restrict the blocks was implemented to prevent bad actors from flooding the network with large blocks of fake transactions. Satoshi Nakamoto saw it as the solution to enhance network stability and ensure decentralization. 

However, as Bitcoin gained popularity, its block size became a concern as it is only capable of handling approximately 7 transactions per second, leading to congestion during peak usage times. Miners started prioritizing transactions with higher fees when blocks were full, resulting in increased transaction costs and longer wait times for all users.

There were debates about how best to scale the blockchain to make it capable enough to handle the growing volume of transactions. A response to address these challenges came in 2017 in the form of Segregated Witness (SegWit), which was implemented on the Bitcoin network with a soft fork. 

What Is A Segregated Witness?

Segregated Witness (SegWit), created by Bitcoin developers Pieter Wuille, Eric Lombrozo, and Johnson Lau, is designed to improve the transaction throughput on the blockchain by dividing a transaction into two segments, where the signature or “witness” data is removed from the remaining portion that contains the sender and receiver data. 

Although SegWit is referred to as a Bitcoin protocol, it is worth noting that the first blockchain to implement the transaction execution layer was Litecoin. 

In essence, SegWit reduces the weight of transactions in a block through the segregation of transaction data, creating more space within a block of the same size and enabling more data to be included. 

The first part of a blockchain transaction contains the wallet addresses of the sender and receiver, and the second part consists of the “witness data” that contains transaction signatures. SegWit moves the witness data from the main block, thereby reducing the size of the transaction. Consequently, the remaining portion of the data requires less space, enabling more transactions to be added to a block, and increasing the transaction capacity of blockchains such as Bitcoin and Litecoin. 

How Does SegWit Work?

SegWit saw the Bitcoin network transition to a block weight limit of 4 million weight units (WU). Since old blocks on the blockchain were limited to 1 MB, many users believed that 1 MB equals 1 million WU, and the upgrade would increase the block size to 4MB. However, that is not the case as the block weight increase meant more transactions could be fit within a single block. 

The block size limit on the network is not a restriction based on the megabytes, but a limit based on the weight of the transaction. This takes into account the block’s base size and the total size of the Bitcoin network. By separating signature data from the transaction data, SegWit created more space within the block, which increased the speed of validation.

Let’s take a look at how it works

• SegWit separates digital signatures from the transaction data itself. This subsequently reduces the size of each transaction, allowing more transactions to be added to a single block. The segregation allows the blockchain to process more transactions without physically increasing the block size limit. 

• SegWit introduced a new metric called “block weight”, where each byte of a Bitcoin transaction data weighs 4 million WU. While the 4 million WU is smaller compared to the 1 MB block size, when the witness data is taken into account, the total size of the transaction is larger than the block size limit. 

• SegWit also addresses another critical problem of Bitcoin, which is transaction malleability. Users can change transaction hashes or IDs without invalidating them. However, since the signature data is moved out of the transaction data, it is no longer possible to alter the transaction ID, thus preventing any potential confusion while enhancing security. 

SegWit also introduced its native address format known as Bech32, which starts with “bc1”. These addresses are specifically designed for SegWit transactions and offer lower fees compared to legacy addresses that start with “1” or “3”. The lower cost factor encourages users to adopt SegWit for their on-chain transactions.

Benefits Of Segregated Witness (SegWit)

The benefits of SegWit go beyond increasing a block’s transaction handling capabilities and making the network faster. 

• By reducing the size of on-chain transactions through data separation, SegWit allows users to transact on the Bitcoin and Litecoin networks at lower rates. This comes particularly handy when the blockchain is experiencing high levels of congestion. 
• The ability to include more transactions within each block leads to faster processing times. This makes the blockchain more scalable and capable of handling increased user demand. 
• SegWit’s architecture has paved the way for other advanced scaling solutions on Bitcoin and Litecoin, such as the Lightning Network and Taproot technology. 

Final Thoughts

SegWit marks a crucial advancement in Bitcoin’s functionality, addressing its limitations when it comes to scalability and speed. The protocol is now utilized for more than 60% of Bitcoin transactions and has paved the way for future innovations in proof-of-work blockchains.