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SegWit Explained in a Way You Can UnderstandDownloadSubscribe

SegWit Explained in a Way You Can Understand

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SegWit Explained (Quick Explanation)

SegWit is a protocol update to Bitcoin that makes Bitcoin transaction sizes smaller, which allows Bitcoin to handle more transactions at once (scalability). It achieves this by separating Bitcoin signature data from transaction data.

Want SegWit explained even further? See below!

Or prefer a video explanation of SegWit? Check our video on Segwit vs Native Segwit (Bitcoin segregated witness explained)!


SegWit Explained (More Detailed Explanation)

SegWit, also known as Segregated Witness or Bitcoin Improvement Proposal (BIP) 141, was a response to Bitcoin’s scalability problem, or struggle to handle increasing amounts of transactions, as Bitcoin continued to gain in popularity. SegWit was activated on August 24th, 2017.

Proposed initially by Bitcoin developer Dr. Pieter Wuille, SegWit called for the segregation of digital signatures and other data (collectively called the “witness”) from transaction data, hence the name “SegWit”.

The reason for this proposal was that digital signatures made up 65% of the transaction size for a given transaction. By segregating this data from the rest of the transaction data and moving it to the end of the transaction, Bitcoin transactions would become much smaller in size.

segwit explained in a picture by cointelegraph
Image representation of Non-SegWit vs. SegWit transactions. Image credit: Cointelegraph

Effectively, the 1 megabyte (MB) size of a Bitcoin block (grouping of transactions that gets added to the blockchain, or record of all transactions), would expand to about 4 MB.

Such a change would significantly increase the throughput, or transaction capacity, of Bitcoin, which handles more and more transactions with each passing day:

Towards the beginning of Bitcoin’s history, there was no need to consider scalability improvements, since transactions were cheap and fast with so little people using the network. However, these days there are regularly 100s of 1000s of transactions per day, which made cries for network upgrades more urgent. Image credit: BitInfoCharts

Transaction malleability

Another thing SegWit does aside from increasing the transaction capacity of Bitcoin is solving the transaction malleability bug. Transaction malleability allows a transaction receiver to intercept and modify a transaction sender’s signature, which changes the transaction ID. By doing so, the receiver can get more coins from the sender.

SegWit solves this by segregating the sender’s digital signature from the rest of the transaction. With the signature separate from the rest of the transaction, the malicious receiver has no way of changing the sender’s transaction ID and receiving more coins from the sender than originally intended.

Instead, other non-tamperable parts of the transaction are used to create the transaction ID.

Visual representation of how SegWit separates the witness data from the rest of the transaction, allowing for the computation of transaction IDs without signatures, which can be tampered with. Image credit: Dmitry Laptev

Solving the transaction malleability bug not only increases the security of Bitcoin, but it also allows for the implementation of Lightning Network, another Bitcoin scalability proposal. (Lightning can’t work without removing transaction malleability). When combined with SegWit, Lightning would allow for Bitcoin to process millions of transactions per second, paving the way for true Bitcoin mass adoption.


SegWit was a Bitcoin Soft Fork

Changes to the Bitcoin protocol are called Bitcoin forks.

There are two kinds of forks - soft forks and hard forks.

Soft forks are backwards compatible with nodes (computers or servers that store copies of the Bitcoin blockchain) running old software. On the other hand, hard forks are not backwards compatible. Nodes have to update to the new Bitcoin protocol. If not, a split in the blockchain occurs, creating two separate cryptocurrencies.

To minimize disruption to Bitcoin, SegWit was a soft fork.


Bitcoin SegWit vs Native SegWit

If you’ve used a Bitcoin wallet that supports SegWit, you might’ve noticed that your Bitcoin wallet has different kinds of Bitcoin addresses. Some might start with “1”, some might start with a “3”, and some might start with “bc1”.

Bitcoin addresses that start with a “1” are Legacy addresses that existed before SegWit. Addresses that start with “3” are P2SH or multi-purpose addresses that support both non-SegWit and SegWit transactions. Addresses that start with “bc1” are bech32 or native SegWit addresses that are the newest, SegWit-only address format with the lowest transaction fees.

Check with your wallet to see if it supports both non-SegWit and SegWit addresses. The Exodus BTC wallet supports Legacy, P2SH, and bech32 addresses, but the situation varies from wallet to wallet. Especially when it comes to native SegWit addresses - not all wallets and services support them or sending to them. In these cases, it’s useful to have a BTC wallet that supports all types of addresses so you can receive Bitcoin no matter what.

SegWit Transactions

Though SegWit wasn’t a mandatory upgrade, the percentage of SegWit transactions has been increasing steadily since SegWit’s introduction and is ~55% as of writing:

segwit transactions chart
Image credit: Woobull Charts

SegWit Bitcoin Wallet

As mentioned earlier, not all wallets support SegWit. If you’re using a wallet that doesn’t support SegWit, you won’t be able to send Bitcoin to a native SegWit address (starting with “bc1”). Moreover, you’ll always pay higher fees than someone using a SegWit Bitcoin wallet like Exodus.

On top of SegWit support, Exodus also:

  • Is a highly-rated wallet (iOS reviews, Android reviews) with over 4 million downloads
  • Gives you control of your private keys
  • Emphasizes design and ease of use, with team members having done design work for the likes of Apple, BMW, and Louis Vuitton
  • Supports desktop, mobile, and hardware wallet (Trezor) integration for enhanced security
  • Lets you exchange crypto assets right from your wallet, without creating an account
  • Supports synchronization of your desktop and mobile wallets for multi-device access to your crypto
  • Supports multiple Bitcoin addresses for enhanced transaction privacy (vs. reusing addresses)
  • And offers 24/7, fast real human support to answer any questions
  • The Exodus Bitcoin mobile wallet’s exchange screen.

    Conclusion

    So there you have it - SegWit explained in a way you can actually understand (we hope)!

    Though we didn’t mention it earlier in the article, SegWit did cause some controversy, as not everyone in the Bitcoin community supported SegWit at the time of its introduction. Even today, while SegWit adoption has been steadily increasing as shown in the SegWit Transactions section, there are still people who don’t use SegWit.

    The biggest critics of SegWit went off and created their own fork - in this case a hard fork, or split of Bitcoin - called Bitcoin Cash. Though reasons for Bitcoin Cash’s SegWit disapproval are debated, many believe it had to do with SegWit rendering “AsicBoost” ineffective.

    AsicBoost is a type of mining firmware that lets some miners mine new Bitcoin blocks more efficiently. In other words, AsicBoost gives miners with AsicBoost a competitive advantage that lets them earn more money. Some influential miners helped start Bitcoin Cash so this theory does make sense.

    Regardless though, SegWit does make transactions cheaper, which is becoming increasingly important to Bitcoin users, as Bitcoin becomes more and more popular.

    Whether or not SegWit will achieve full adoption is to be seen, but given the steady rise in SegWit adoption, lower fees for users, and enabling of Lightning Network, we believe that it has a good chance.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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