Bitcoin scalability is an ongoing issue for the world’s most popular crypto and one that Bitcoin developers have struggled to solve. One solution introduced was the SegWit soft fork, which altered the number of Bitcoin transactions that could be processed simultaneously.
While raising the number of transactions per Bitcoin block sounds like a surefire win, SegWit had issues, too.
How Do Bitcoin Transactions Work?
Bitcoin transactions use the UTXO (Unspent Transaction Output) Model, in which each transaction spends the previous transaction’s output on the blockchain and generates a new output that can be spent in the following transaction.
By design, you don’t own a Bitcoin token. You instead own the unspent output of a set number of previous transactions. You can prove ownership of this output through the requisite address, digital key, and digital signature.
Let’s assume you want to send bitcoin to your best friend. You will first use a private key to sign a message containing the input, output, and amount. The transaction is broadcast to the entire Bitcoin network, and all users can see it.
When a node receives the transaction, it checks whether:
- Your private key matches the public key you claim to own
- The sum of inputs is greater than the sum of its outputs
- The output is unspent.
If the transaction fulfills these three rules, it’s verified and passed along to other nodes, which repeat the verification process. This process involves complex mathematical puzzles, which the miners with the highest crypto hash rate have the best chance of solving first.
Miner nodes compete to solve the puzzles, and if successful, they mine the block template into an immutable block in the blockchain. The block is broadcast to the entire network, and it’s clear that your best friend owns the new unspent output.
What Is the Transaction Malleability Flaw?
Scalability and speed are not the only issues that plague the bitcoin blockchain. Unfortunately, there’s also the “transaction malleability flaw,” a defect that allows for the alteration of the digital signature of a transaction before it’s confirmed on the blockchain.
This modification is made in such a way that the transaction retains its mathematical logic but yields a different result when run through a hashing algorithm.
Take, for instance, the signature value of your transaction with your best friend, which was (5). If it’s changed to (5-10+10), the mathematical value is still 5, but if we hash these different versions, we get different results.
Since the hash is how the transaction is identified in the blockchain, this change causes a few problems.
- Bad actors can create a second conflicting transaction before the first one is confirmed, causing confusion, delay, and congestion in the network.
- It makes it problematic for blockchain developers to build second-layer solutions meant to improve the speed and scalability of the mainnet.
So this is a defect with the potential to make blockchain bookkeeping a nightmare, and several solutions have been implemented to solve it. And that’s where bitcoin SegWit comes in.
What Is Bitcoin SegWit?
Segregated Witness (SegWit) is a Bitcoin blockchain protocol upgrade primarily developed to protect against transaction malleability.
SegWit was first proposed in 2015 as a blockchain fork to improve scalability. SegWit would accomplish this by separating digital signatures from transaction data, allowing more transactions to be stored in a single block and reducing the time required to process a single block.
The SegWit soft fork was finally implemented in 2017, introducing many improvements to the Bitcoin blockchain, besides solving the malleability flaw and improving transaction efficiency.
What Is SegWit2x?
Before SegWit was implemented, there was a bit of a tussle in the Bitcoin community due to a proposal hard fork upgrade aimed at increasing the block size limit from 1MB to 2MB to improve transaction processing speed, hence the term “SegWit2x.”
While many stakeholders supported the idea, disagreements arose within the community, and a lack of consensus led to a split. The breakaway faction formed Bitcoin Cash (BCH), while the parent group went on to implement SegWit.
How Does Bitcoin SegWit Work?
SegWit works by separating some data from the block, making it unavailable for modifications. This separation creates two sections. The first section of the block contains the sender and receiver’s wallet addresses, while the second section contains the digital signatures, also known as “witness data.”
Because witness data is separated from the main block, more space in the block is freed up for more transaction data to be recorded. This, in turn, increases the capacity of the block and directly impacts the performance of the Bitcoin network, significantly improving scalability.
On the other hand, the segregated data, i.e., the digital signature, is encrypted and stored on a sidechain. This added layer of security on top of the separation from the mainnet makes it impossible to change the transaction’s digital signature, hence solving the malleability flaw.
Advantages of Bitcoin SegWit
SegWit provides several benefits to the Bitcoin network.
- Solves transaction malleability: As mentioned earlier, SegWit fixes the transaction malleability flaw that caused a lot of confusion and congestion in the bitcoin blockchain. This allowed for more reliable and secure transactions.
- Improved security: By solving transaction malleability, SegWit made the bitcoin network more secure and less vulnerable to attacks. It also made it easier to implement new security features in the future.
- Improved scalability: Scalability is the increase in the performance of a system. That’s what happened to Bitcoin after the SegWit soft fork. More transactions could be included in blocks due to freed up space, delivering reduced transaction fees and faster transaction confirmation times.
- Lower transaction fees: As more transactions could be fit in one Bitcoin block, the competition for block space reduced, which in turn lowered transaction fees. This was especially beneficial to small transactions.
- Improved compatibility: By virtue of being a soft fork, SegWit enabled the extensibility of the blockchain while also opening the door for future upgrades (like the Taproot upgrade) to the Bitcoin network. This flexibility provides the blockchain with the ability to implement new features and improvements.
- Inspired creation of Lightning Network (LN): When SegWit improved scalability, its code inspired the development of a Layer-2 solution: the Lightning Network. LN’s code enables the creation of an off-chain payment channel between two transacting parties, improving the mainnet’s speed and lowering the transaction cost.
SegWit was a crucial upgrade to the Bitcoin network because it offered solutions that improved its performance and made the experience better for bitcoin users. However, it did not come without its fair share of new challenges.
Disadvantages of SegWit
The SegWit soft fork introduced a couple of potential disadvantages.
For example, while many exchanges and wallets have adopted SegWit, not all nodes support the new protocol. Moreover, since SegWit reduces transaction fees while requiring support for the witness-data sidechain, profit-oriented miners dislike it and can be reluctant to apply it.
Furthermore, due to the sheer size of the Bitcoin network, SegWit is not enough to address its scalability issue. There’s a need for a significant adjustment of the blockchain to reduce its size and increase scalability to a level similar to alternative blockchains.
Even though SegWit has these drawbacks, it’s clear that the security and scalability benefits far outweigh the problems.
Was Bitcoin SegWit a Good Idea?
SegWit prevented a flaw from causing so much lag in the Bitcoin blockchain at a time when its adoption was gaining traction. Indeed, it was a long time coming for the development to be implemented. While some miners experienced a negative impact on their wallets, the soft fork improved the blockchain’s security and reliability, positively impacting the Bitcoin network.
