SegWit term is an abbreviation for the term Segregated Witness, which translates as “separate witness”. It is much easier to understand the meaning of this term if we take a look at the transaction structure inside of the Bitcoin blockchain.
A typical transaction consists of two parts:
Crypto-code is a confirmation that the transaction participant has completed the transaction. The witness part is a sort of Achilles heel for the blockchain because it can formally be changed once it appeared in the block.
However, this does not mean that bitcoins will not be sent to the right address. Segregated Witness part complicates the generating of new transactions because blockchain represents a chain of blocks. Non-confirmed operations slow down the speed of generating the new ones as they are based on data from previous transactions.
In other words, a fake signature may slow down the operating speed of the blockchain network and complicate large-scale updates.
This issue is a network problem and it is often called a “transactional plasticity error.”
In order to solve the issue, the cryptocurrency community created SegWit.
Eventually, as is the case with all large projects, there is a need to scale. To scale for SegWit meant to implement something radical and, therefore, it was decided to introduce it at the level as the hard fork. Once the hard fork is done, the Bitcoin block should have increased up to 2MB.
From one point of view, SegWit2x resolves the scalability issues, but from the other, it jeopardizes the entire network security. For instance, there was no tool for protection from the so-called double-spending attacks, and potential activation may trigger an undesirable effect on investors and even on the cryptocurrency miners.
Comparing the pros and cons, the cryptocurrency community has decided to cancel the implementation of the SegWit 2x hard fork.
The main reason for the failure of implementing SegWit 2x is the absence of consensus inside of the cryptocurrency community.
Cryptocurrency miners considered SegWit 2x as a threat of undermining the entire network because hard fork itself means the destruction of the network.
However, the rejection of SegWit 2x has its advantages. For example, Civic (CVC) CEO Winnie Lingham thinks that the rejection of the SegWit 2x hard fork contributed to the growth in popularity of Bitcoin Cash (BCH).
A soft fork is nothing more than just an update for the blockchain network. Hard fork divides a blockchain network into two parts and requires participants to align the mating blocks that are incompatible with the new software.
SegWit is a software fork.
First of all, SegWit, as a soft fork, solved the problem, called «transaction malleability.» It made it possible to avoid changes in transaction data to the network before the network process a transaction. Thus, SegWit maintains transaction integrity, while keeping the size of a block within a 1MB range.
The outcome of SegWit — fast and more secure bitcoin.
SegWit was not fully integrated by all the participants of the Bitcoin network because its integration is not necessary. In addition, the update of Bitcoin has always been a tough nut to crack.
For the full implementation, SegWit needs to update all of the wallets, exchanges and the companies that somehow contact blockchain.
The final decision for the future SegWit still remains in the hands of a small number of the magnates of the cryptocurrency industry, rather than enthusiastic.
Today SegWit is supported on all hardware lines of wallets — Ledger, Trezor and KeepKey. Almost all popular desktop and mobile wallets, including Exodus, Electrum, Samourai Wallet, Green Address, Jaxx and Coinbase Wallet, announced support for Segregated Witness.
Moreover, SegWit is also available by default in all versions of the Bitcoin Core client starting from August 2017.
However, the famous bitcoin custody Blockchain.com, which is the oldest online bitcoin wallet, does not support SegWit so far. The lack of the SegWit update has only a short-term negative effect. Eventually, even if the plans to increase the block size to 2MB will be implemented in the future, this may not be enough to maintain an acceptable bandwidth, which undoubtedly will be supplemented by new entrants to the growing popularity of bitcoin.
Blockstream experts promise that the Lightning Network should solve this problem. If they do manage to implement a full-scale implementation of SegWit support, it can give the same impetus for more active development of the Bitcoin ecosystem, which is so necessary to become a global means of payment.
However, surprisingly, today SegWit uses only about 40% of transactions in the whole Bitcoin network. This means that the Bitcoin network capacity is not fully optimized.
The available space is wasted, which leads to an increase in fees for each transaction. Fees are pretty low right now, but we can easily remember the dramatic surge when they have skyrocketed up to hundreds of dollars in the past year.
One reason may be the lack of sufficient incentives. Most of the current transaction are SegWit format P2SH address, which is backward compatible with clients that do not support SegWit. This allows the recipient to use the transaction SegWit, even if the sender does not yet support it. This compatibility enables to contribute to the promotion of the adoption process, even though it has little to promote the sender’s transaction to upgrade.