SegWit or Segregated Witness refers to a Bitcoin Improvement Protocol (BIP) put forward by Peter Wiulle in 2017. The protocol aims to improve the transaction speed on the Bitcoin network in a bid to make transactions faster by removing transaction signature data.
SegWit is a soft fork upgrade to the Bitcoin network, which increases the block size limits of the network by reducing transaction size on the entire blockchain network.
This idea was first suggested in 2015 at a Scaling Bitcoin conference before its implementation in 2017.
How does SegWit work?
Bitcoin transactions are secured and distributed across a peer-to-peer network of computer nodes. A typical bitcoin transaction is made up of two segments – the input and output data. For example, the input will contain a sender’s public address, digital signatures to verify the transactions, and associated metadata. The output will contain at least the receiver’s public address.
When a transaction is initiated on the bitcoin network, copies of that transaction is sent to the other node operators on the network, and a 51% consensus is required before it is validated and added to a block. However, the number of transactions that can be added to a block is limited as each block has a maximum size of 1 MB, consequently leading to a limited number of transactions per block, a slower transaction throughput at peak periods involving thousands of transactions, and increased transaction fees. In contrast with traditional payment channels like PayPal, processing 1700 transactions per second, a solution was needed to speed up individual transactions on the network.
SegWit addresses this issue by separating the digital signature from the transaction data (moving them towards the end of the transaction), making up about 65% of the original transaction data. This drastically reduces the size of transactions (or transaction weight), enabling them to be broadcasted faster on the network alongside a modest increase in the number of transactions to be processed. Given the larger block sizes (which amounts to about 4 MB in size), transaction costs are also reduced as more transactions are processed in due time.
Stripping off transaction signatures from the input field of any single transaction also improves security. Since the digital signature is moved towards the end of the transaction, the input transaction ID can not be altered to get more crypto assets from the sender’s address.