The problems of scalability are gradually popping up across a broad range of blockchain networks operational today. Take the Bitcoin network, for example. It has been working for almost more than a decade now, without any massive incidents. On the other hand, there have been instances when the transaction costs have soared to unreasonably high margins.
Therefore, Segregated Witness or SegWit emerged as a promising solution for scalability to manage the constantly expanding transaction volumes. Is SegWit a reliable solution for improving scalability on the Bitcoin blockchain? Can you apply SegWit to other blockchain networks? The following discussion helps you find out more about SegWit alongside in-depth insights on how it works.
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What is SegWit?
The first and obvious addition in any discussion on the SegWit wallet and functionalities would focus on the definition of SegWit. SegWit is basically a protocol upgrade for the Bitcoin blockchain network. The protocol upgrade found its roots in 2015 and primarily focused on addressing the problem of scalability in blockchain networks. The Bitcoin network takes around 10 minutes on average to validate every new block. Therefore, the block size plays a crucial role in determining the number of transactions each block can confirm. As of now, the Bitcoin blockchain network can process almost 7 transactions per second.
The primary idea behind the working of Segregated Witness focuses on reorganizing block data. By applying SegWit, you would separate signatures from transaction data, thereby earning the right name. The segregation of witnesses or signatures from the transaction data helps in storing more transactions in a single block.
As a result, SegWit can support improvements in network throughput with ease. The SegWit protocol upgrade was implemented in 2017 as a soft fork of the Bitcoin network and introduced many benefits. Many cryptocurrency projects, such as Litecoin and Bitcoin, use the protocol upgrade for its valuable benefits.
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How Does SegWit Work?
The answers to “What is SegWit?” would draw the attention of any beginner towards the working of SegWit. The basic objective of SegWit focuses on improving transaction throughput on blockchain networks. In simple words, SegWit helps in reducing the weight of transactions in a block by separating a transaction into two sections. The simple explanation for working on the Segregated Witness protocol upgrade suggests evident outcomes of effective growth in a number of transactions you can include in blocks.
If you want to know “Is SegWit faster?” you would have to dive deeper into the working. Of the two parts of the transaction, the first one contains the wallet addresses of the sender and receiver. The second part of the transaction contains the transaction signatures or witness data. SegWit helps in removing the witness data from the main block, thereby supporting a viable reduction in transaction size. As a result, the transactions would consume less space, thereby ensuring faster transaction processing in each block. Another important highlight in the working of SegWit refers to the modification of transaction hashes, which resolves the issues due to transaction malleability.
How Does SegWit Solve Transaction Malleability?
A detailed understanding of how Segregated Witness works would remain incomplete without discussing transaction malleability. The issue of transaction malleability in Bitcoin and other blockchain networks involves modification of the Bitcoin code for changing witness data before confirming transactions.
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What is Transaction Malleability?
Let us assume that John has to pay 10 BTC to Steven. Now, Steven wants to trick John into paying 20 BTC and changes John’s witness data before transaction confirmation. As a result, the transaction ID changes without any changes in the transaction. Steven receives the 10 BTC, and when the network confirms the modified transaction, it cancels the original transaction.
When Steven complains to John that he has not received the 10 BTC, John finds that the original transaction has been reverted. John would send the 10 BTC again to Steven with a higher transaction fee without any knowledge of the trick. Interestingly, no one in the network can figure out such scams.
SegWit Fix for Transaction Malleability
The basic way in which a SegWit wallet works by separating witness data is the most prominent highlight for addressing the problem of transaction malleability. SegWit can separate witness data from the block, thereby making it unavailable for modifications to change transaction IDs. The Segregated Witness protocol upgrade develops a sidechain for storing witness data separately from the main blockchain network. As a result, fraudsters such as Steven couldn’t modify transaction IDs anymore.
Another important highlight of SegWit for resolving transaction malleability is backward compatibility. Nodes updated with the SegWit protocol can still work with outdated nodes. Such types of updates are referred to as soft forks. On the other hand, hard fork updates are not backward compatible and can lead to division in existing blockchain networks. Therefore, SegWit came up with a solution for recording witness data on the main blockchain. The detailed guides on how to use SegWit show that it helps in the encryption of all witness data on a sidechain while storing the root code on the main blockchain.
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Advantage of Scalability
The biggest advantage associated with Segregated Witness obviously refers to improved scalability. SegWit can resolve the issues due to transaction malleability without any doubts. However, the ways in which SegWit has been conclusively beneficial for improving scalability show how it will become an inevitable aspect in the future of blockchain.
Scalability is basically the ability of networks to process large amounts of transactions without slowing down transaction speeds. In the case of scalable networks, the transaction processing speed is faster as the network grows in size. However, many blockchain networks start becoming slower as they grow in size.
The scalability problem in cryptocurrencies emerges profoundly from processing transactions through consensus. Over half of the nodes on Bitcoin must verify the validity of a transaction before adding it to the blockchain. As the number of nodes on the network increases, the time required for reaching a consensus also increases profoundly. Many people ask, “Is SegWit faster?” and the ways in which it has improved scalability provide the right answer.
As a matter of fact, witness data occupied almost 65% of Bitcoin blocks, and SegWit removed the problem of storing witness data on the main blockchain. With the help of SegWit, Bitcoin blocks can have additional space for transaction information. SegWit helps the network improve its processing capability without changing the overall blockchain size of Bitcoin. In simple words, SegWit makes the blockchain network lighter.
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How to Use SegWit?
Many of you must be eager to find out more about a SegWit wallet or a supported blockchain network. One of the best examples of using SegWit refers to the Lightning Network, which is a viable solution to the scalability problem on Bitcoin. You can use the lightning network for setting up micropayments. Let us call back John and Steven for another example to understand how to use SegWit in the Lightning Network.
John works for Steven, who pays 1 BTC to him every day. Without processing the transactions on the main blockchain network, John and Steven create a private payment channel through which Steven can send Bitcoin directly to John. The micropayments are valued at around 1BTC per day and must have the signatures of John and Steven. Therefore, you can easily classify them as multi-signature transactions. When John’s tenure ends in five days, he receives a total of 5 BTC. John and Steven can close the payment channel, and the transaction would be visible on the network as a single transaction of 5 BTC.
Such type of payment channels based on the principle of Segregated Witness can help in configuring a lightning network. The lightning network includes multiple micropayments happening away from the main blockchain network. Most important of all, transactions become a part of the main blockchain only when users close the payment channels.
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SegWit has been implemented as a soft fork upgrade for improving scalability and resolving the problems of transaction malleability. The SegWit protocol upgrade also ensures backward compatibility. As a result, you won’t experience any difficulties with how to use SegWit with nodes that have not been updated. On the other hand, developers proposed another hard fork upgrade for a SegWit implementation termed as SegWit 2X or S2X.
The most notable difference between SegWit and SegWit 2X would refer to the additional improvements with the latter. In the case of SegWit 2X, you would find the evident modification in transaction batching alongside the increment in block size. However, it is also important to note that the larger block size can also impose a heavier burden on miners and node operators due to high data volumes.
Another significant highlight of the SegWit upgrade protocol refers to the support of the Bitcoin community. On the contrary, the SegWit 2X proposal demanded substantial changes in fundamental governance rules for Bitcoin. Ultimately, developers never reached a consensus on adopting or implementing SegWit 2X, and the proposal was suspended.
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Nested SegWit and Native SegWit
Another significant highlight is a guide on “What is SegWit?” is the overview of nested SegWit and native SegWit. The Native SegWit also referred to as bech32, is basically an upgraded version of the Nested SegWit protocol upgrade. In the bech32 format, SegWit offers improved transaction speed, lower transaction fees, and considerably better error-detection mechanisms.
On top of it, all the bech32 addresses are lowercase, which improves readability. It is important to note that all blockchain transactions among native SegWit, non-SegWit and nested SegWit wallet are completely compatible. On the other hand, you may not find SegWit support on all crypto exchanges and crypto wallets. Therefore, you may not withdraw funds directly to SegWit addresses in certain cases.
Setbacks of SegWit
The formidable value advantages of the Segregated Witness protocol upgrade can overshadow its setbacks. However, you must know the challenges with SegWit for developing a comprehensively balanced impression of its functionalities of SegWit. First of all, many nodes are not using SegWit, and SegWit transactions in the Bitcoin network are not as fast as that in other altcoin networks. Furthermore, many experts also claim that the SegWit upgrade accidentally resolved the scalability problem. In addition, you can take note of how SegWit resulted in divisions throughout the Bitcoin community.
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The primary answer to “What is SegWit?” speaks too little about its capabilities. Tailored as a protocol upgrade for resolving the problems of transaction malleability, SegWit has emerged as a conclusive solution to scalability problems on blockchain networks. It basically works by separating transaction data and witness data, thereby leaving little room for modification in transaction IDs.
At the same time, separating the witness data from the main blockchain network in crypto transactions increase block space for transaction data. Therefore, SegWit transactions are faster than general crypto transactions. However, the skepticism regarding SegWit and new developments creates many questions about its future. Learn more about SegWit and explore how it can be used.
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*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!