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SegWit (Segregated Witness) – What Is It and How Does It Work?

From Satoshi Nakamoto’s historic whitepaper to modern times, the world of cryptocurrencies has changed a lot. This sector has brought about a real revolution in the world economy in just under ten years.

Not everyone knows that the algorithm created following Nakamoto’s paper has undergone several changes over time. This software (known as “Bitcoin Core”) has shown more rigidity than many modern blockchains.

For this reason, analyzing one of its significant changes over time is an exciting aspect. Therefore, this article will explain the Segregated Witness (or SegWit) system analyzing its benefits.

SegWit: definition and historical context

SegWit is a protocol that aims to reduce the size of a block in a blockchain. Moreover, as we will soon see, the operation leads to greater efficiency of the transaction system.

SegWit introduces segregation of the information related to the single on-chain transaction. The system divides the sender and the recipient data from the digital signature and the scripts.

In this case, therefore, the “witness” represents the signature that validates the single transaction. With this in mind, it is helpful to remind the reader of the historical context of the SegWit introduction.

The idea of SegWit comes from the mind of Pieter Wuille, one of the most well-known characters in the Bitcoin world. The industry knows Wuille as, among other things, one of the leading developers of the Bitcoin Core project.

In December 2015, Wuille shared his idea at the international “Scaling Bitcoin” conference. At the time, the number of wallets containing Bitcoin was starting to grow strongly, creating exciting debates in the sector.

One of the main topics of debate was the scalability of Bitcoin. In other words, the world was wondering about the technical possibility of mass adoption of BTC. This theme has several complex technical aspects, and the next section will help us shed some light on this.

Understanding how the block size limit works

The maximum size of a single block in the chain does not exceed 1 MB. This limit comes from a decision by Nakamoto, who silently added this value to the source code. Hence, many in-depth studies on the subject, but we only need to focus on this number.

Had we looked at the historical progression of the average BTC block size, we would have understood Wuille’s concerns in 2015. While in 2011, the average block size was less than 30 kb, in 2012, the system exceeded the average of 100 kb.

In 2013 the world saw this number exceed the threshold of 200 kb, only to reach 400 kb in 2014. When the scalability conference occurred the following year, the blockchain recorded dimensions even higher than 800 kb.

What is essential to know is that limiting this size also means limiting the number of transactions in a block. In particular, data estimates this value to be between 2,000 and 2,500 transactions per block.

Anyone who hears about this topic for the first time will have an obvious question in their mind. Did anybody think of increasing the block size in Bitcoin to improve its scalability?

The answer is that, of course, many developers in the BTC community have proposed this type of upgrade. However, this operation has not convinced most developers to date is rather technical.

If we wanted to simplify this controversy, larger blocks would lead to more expensive nodes. But, on the other hand, if the system complicates this execution, several nodes may cease to operate in the long run.

As a result, the system would suffer from less decentralization, making a blockchain more vulnerable to hackers.

The benefits of using SegWit

After the announcement of Wuille and the first work of the developers, an exciting page appeared on Bitcoin Core. The development team decided to publicly share the benefits of SegWit in the BTC system with a very detailed analysis.

Those unfamiliar with the more technical aspects of a blockchain may find it difficult to understand these benefits fully. The following subsections simplify the main points highlighted by the developers.

Third-party malleability

Let’s start, first of all, with the discourse of “third-party malleability”. Each transaction in BTC has a hexadecimal hash of 64 digits. Before SegWit, a third party could change the identification code.

This behavior made it more difficult to track the exact diffusion of Bitcoins in the system. The introduction of SegWit has eliminated this possibility of modification by separating the information flows of a block.

The issue of quadratic scaling

The growth in the size of a block leads to a quadratic progression in transactions execution time. In simpler words, a 200 kb block takes more than twice the time of a 100 kb block to validate a transaction.

SegWit has simplified the transaction hashes calculation process, eliminating this problem.

A block size trick

SegWit did not increase the 1 Mb block size limit. At the same time, however, the new protocol has increased the transaction limit significantly. But how did the developers achieve this level of efficiency?

The trick is simple: the 1 Mb limit does not apply to the sum of the two segregated components. Moving the data to the digital signature allows the algorithm to manage larger blocks (between 1.6 and 2 Mb).

Final thoughts

The introduction of SegWit represents one of the significant evolutions in the growth of the scalability of a blockchain. However, to date, it is not clear whether the BTC community will decide to increase the system’s block size.

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Meanwhile, solutions like SegWit have brought some benefits, with greater efficiency in the blockchain. We will observe whether the BTC community will deem these technical tricks sufficient to achieve mass adoption.

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