What is SegWit (Segregated Witness)?

Almost everyone who has entered the cryptocurrency world or has been in the field for a while has heard of a concept that is often not fully grasped due to its technical intricacies: SegWit (Segregated Witness). As one of the most critical innovations that unlocked Bitcoin’s (BTC) potential and propelled it towards becoming a global payment system, SegWit is not merely a technical term; it is a revolution designed to tackle Bitcoin’s inherent scalability challenge.

Defining SegWit: What Does Segregated Witness Truly Mean?

SegWit is an acronym for “Segregated Witness.” Fundamentally, it is a protocol upgrade that was implemented on the Bitcoin network via a soft fork in 2017.

So, what exactly is a “Witness”?

In the context of the blockchain, the “Witness” refers to the digital signature and related data that proves the validity of a Bitcoin transaction. In simple terms, when you send Bitcoin from one wallet to another, this is the cryptographic data that proves the transaction was indeed initiated by you. In traditional (Legacy) Bitcoin transactions, this signature data was stored within the block alongside the other transaction details (sender, recipient, amount).

The innovation brought by SegWit begins right here: It separates (Segregates) the Witness data (signatures) from the main body of the transaction and stores it in a separate data structure.

This separation reduces the amount of data recorded on the blockchain, yet it never compromises the validity or security of the transactions. SegWit is a creative engineering solution that preserves Bitcoin’s fundamental block size (1 MB) while significantly increasing the number of transactions that can be confirmed simultaneously.

How Does SegWit Work? A Simple Look at the Technical Details

Understanding the working principle of SegWit means understanding Bitcoin’s struggle with scaling.

1. Separation of Signature Data

The essence of SegWit, as noted above, is the separation of signature data (Witness Data) from the rest of the transaction. This effectively reduces the transaction size and allows more transactions to be fitted into a single 1 MB Bitcoin block.

Traditional Transaction (Legacy): Transaction data + Signature data = 100% Block Space Used
SegWit Transaction: Transaction data + (Separated) Signature data = Less Block Space Occupied

Signature data could account for up to 65% of a transaction’s total size. By moving this data out of the main block structure, it effectively allows more core transaction data to fit inside the same physical 1 MB block, as if there were a larger capacity available.

2. The Concept of Block Weight

SegWit introduced a new metric called Block Weight to replace the old Block Size limit.

Traditional Block Size Limit: 1 MB
SegWit Block Weight Limit: 4 Megabyte units (MegaWeight)

Under this new calculation method:

Every byte in the main body of the transaction (sender, receiver, amount) is counted as 4 units.
Every byte in the separated signature data is counted as only 1 unit.

This asymmetric counting incentivises miners and users to adopt SegWit transactions because the signature data has a much lower impact on the block weight. As a result, while the old 1 MB limit is technically maintained, the Bitcoin network’s effective block size can increase up to approximately 4 MB (though typically observed around 2–3 MB).

Key Advantages SegWit Brought to the Crypto World

SegWit offers a series of vital advantages for Bitcoin and other cryptocurrencies that have adopted it (such as Litecoin):

1. Increased Scalability and Transaction Capacity

SegWit’s biggest promise was to enhance the scalability of the Bitcoin network. By fitting more transactions into blocks, the number of transactions the network can process per second (TPS) has increased, boosting overall transaction throughput.

2. Lower Transaction Fees

When more transactions fit into a block, the cost of block space per transaction decreases. Especially during periods of high network congestion, SegWit transactions enjoy a much higher chance of being confirmed with significantly lower fees compared to traditional (Legacy) transactions. Native SegWit (bech32) addresses maximise this benefit.

3. Solution to the Transaction Malleability Problem

One of SegWit’s most crucial technical contributions was the elimination of the “Transaction Malleability” problem. This vulnerability carried the risk that a transaction’s signature data could be modified by a third party before confirmation, manipulating the transaction’s identifier (Transaction ID).

SegWit prevented this manipulation by separating the signatures from the area where the transaction ID is calculated. This was a critical security improvement for the network.

4. Paving the Way for the Lightning Network

The resolution of the transaction malleability issue made possible the development of the Lightning Network, Bitcoin’s most exciting second-layer (Layer 2) scaling solution. Without SegWit, the Lightning Network could not have operated securely. The Lightning Network is a technology that allows Bitcoin to process millions of transactions per second instantly and at very low costs.

SegWit Address Types: Legacy, Nested SegWit, and Native SegWit

As users, we primarily notice SegWit through our wallet addresses. Three main Bitcoin address formats exist, reflecting the stages of SegWit adoption:

Address Type	Starting Character	Purpose/Feature	Advantage
Legacy (P2PKH)	1	The original address format before SegWit.	Backward compatibility.
Nested SegWit (P2SH)	3	The first stage of SegWit adoption. Offers SegWit benefits compatible with older wallets.	Extends SegWit benefits to a wider range of wallets.
Native SegWit (Bech32)	bc1	The most efficient and modern form of SegWit.	Lowest transaction fees and faster transaction speed. Addresses are also more readable and have better error checking (contain only lowercase letters).

If you see an option to choose an address type when withdrawing Bitcoin from an exchange or wallet, opting for Native SegWit (starting with bc1) addresses will provide you with the greatest benefit in terms of both speed and fees.

Criticisms and Debates Surrounding SegWit

Although SegWit was implemented with broad consensus within the Bitcoin community, it was not without controversy. The main criticisms were:

Not a “True” Block Size Increase: Some critics argued that SegWit merely used a ‘trick’ by counting data differently rather than genuinely increasing the block size. This faction demanded that the block size be directly increased from 1 MB to a larger value (a stance that eventually led to the creation of Bitcoin Cash).
Centralisation Concerns: Concern was raised that the complex technical structure introduced by SegWit might increase the resources required for small nodes to validate blocks, potentially reducing the network’s decentralisation.

Nevertheless, SegWit has become the most successful and widely accepted scaling solution, adopted by over 90% of Bitcoin transactions today. Its implementation is regarded as a critical turning point in Bitcoin’s technical roadmap.

SegWit’s Role in the Future of Cryptocurrency

SegWit has become a fundamental technology shaping Bitcoin’s current transaction volume and fee structure. Without it, second-layer solutions like the Lightning Network would not be possible, and transaction fees would have reached even more unbearable levels during moments of network congestion.

Today, newer updates built upon the innovations of SegWit, such as Taproot, aim to further enhance Bitcoin’s privacy and smart contract capabilities. SegWit is not just a past upgrade; it is a cornerstone that underpins the future development of Bitcoin.

Understanding SegWit means understanding not only Bitcoin’s history but also the future potential and the ongoing journey of scalability for cryptocurrencies.