What is SegWit?

SegWit is short for Segregated Witness.

It is an update to Bitcoin that was deemed necessary due to the network's lack of scalability and high transaction costs.

Bitcoin developer Pieter Wuille proposed separating the digital signature from the transaction data in 2015.

SegWit was implemented on 21 July 2017. Its full activation followed on 24 August 2017. A soft fork followed on that day, modifying the rules on the Bitcoin blockchain so that all future blocks could work with this update.

What was the reason for the SegWit update?

In the early days of Bitcoin, there was no block size limit. This allowed DDoS (distributed denial of service) attacks to take place on the network, bringing it down.

Satoshi Nakamoto therefore decided to limit the block size to 1 MB. This went well for some time, until Bitcoin became so popular that 1 MB was no longer enough to process all the information in a block in the foreseeable future. Bitcoin became expensive and slow.

How does SegWit work?

When performing a Bitcoin transaction, you have to deal with three components: the public address of the sender and receiver plus the signature. The signature took up so much space (about 2/3rds) in a transaction that it became separated.

With SegWit, the signature data (such as private key) is moved to a separate database and Bitcoin is more secure, cheaper and more scalable. Verifying transactions takes up much less space this way.

Every transaction with Bitcoin has an identification code (TXID or ticker ID). This is a string of characters, the most important part of a Bitcoin transaction. The SegWit update allows many more transactions to be processed per block, greatly improving the speed of the network. The days of just waiting for your transaction to complete were then well and truly over. Transaction fees also went down considerably.

Another problem was also addressed with SegWit. Recipients could intercept the sender's transaction ID and change it to get more coins. Because this ID and the signature were separated, this is now impossible unless you also change the digital signature.

The SegWit update also made blocks larger. This had an effect that people only found out about later. Larger blocks were harder to mine. After the upgrade, there followed a concentration of miners who had the best equipment and were therefore mining the most blocks. This group got richer and richer, while the ones left behind started to drop out.

Afterwards, another wave of concentration followed, with expensive equipment and low power costs becoming the bottlenecks. But this was all put into effect when the SegWit upgrade went online.

Another consequence of SegWit was a hard fork. Bitcoin Cash came into being in response to this update. There was disagreement on the Bitcoin network about whether this was the way to go.

Miners don't like SegWit much either. Because of this update, miners get reduced transaction fees and there are even large groups of miners who don't even want to work with SegWit. So SegWit did shake things up considerably, but for Bitcoin users it is a very useful update, as well as for the network itself. Without SegWit, Bitcoin would probably already have died a painful death, due to network congestion and unbearable transaction costs.