SegWit, short for Segregated Witness, is a system that makes your Bitcoin transactions faster.

Why do we need SegWit?

Think of a single lane highway with 5,000 vehicles driving along smoothly. As traffic builds to 50,000 and more, that single lane becomes clogged forcing you to wait hours on end in congested traffic and maybe miss your appointment. That’s Bitcoin. It’s called the scalability problem, and it’s an issue that the smartest blockchain developers have been trying to find solutions to for years.

SegWit is the Bitcoin team’s solution.

The scalability problem

One of Bitcoin’s most aggravating issues is its lack of speed. Ten transactions take about a second on average to process. Compare that to payment companies like Visa that are able to process around 5,000 to 8,000 transactions per second.

Pay more and you can get yours to the front of the queue, but that makes Bitcoin an expensive and undemocratic system. Besides which, Bitcoin wants to make its platform as efficient and as whizzingly fast as the internet to retain its users and grow its appeal.

The SegWit solution

Bitcoin transactions are made up of blocks with each block able to absorb no more than 1MB of data.

The blocks come in two parts: a header and a body. The header stores a cryptographic hash of the previous block, along with a time signature and other data. The body stores the transactions, including sender data and receiver public keys, which shows you this is a legitimate transaction. Each part takes up room and increases the mass of the block. The signature part alone that is needed to validate the information takes up around 60 percent of its bulk.

In October 2016, Pieter Wuille, co-founder of Blockstream and a Bitcoin Core developer decided to hack of the signature part and put it in a separate block.

Model: Structure of Segregated Witness

This block, called the “witness” block is separate to Bitcoin’s original block. We now have more room in our core block to slip in more information.  The block becomes lighter, so Peter’s idea also helps Bitcoin transactions move more efficiently.

In essence, Bitcoin added a parallel lane to its highway to divert some of its traffic from Route A (call it that) to Route B. Route A has the blocks with sender and receiver data, while the new parallel lane contains the “witness” segment with the scripts and signatures.

Result? The highway is less congested. Your Bitcoin transactions slip through faster.

Other benefits

  • Node performance – The Bitcoin platform is less congested, so nodes can verify blocks, or transactions, faster.
  • Cheaper transactions – At one time, increased demand raised fees. Now, Bitcoin can reduce its fees.
  • Transaction malleability – Originally, the sender’s signature, or the transaction id (txid), was vulnerable to an intruder hacking and changing it and, thereby, hacking the transaction. By SegWit moving the signature from the transaction data to another “lane”, it protects your transaction data from being hacked. 
  • Linear scaling of signature hashing operations – For certain transactions, adding more data, expands the amount of time that each signature needs to be verified. Segwit resolves this by changing the calculation of the transaction hash for signatures so that each byte of a transaction only needs to be hashed no more than twice.
  • Increased security for multi-signature transactions – SegWit provides two different scripts; one to a single public key that is vulnerable to hacking (and therefore to payments being stolen) and another that directs payments to a script hash. This boosts security for multi-signature transactions.
  • Building on top – SegWit frees Bitcoin for the development of second layer protocols, like its lightning network. SegWit activation also boosted development work on other features such as MAST (which enables more complex bitcoin smart contracts), Schnorr signatures (which would enable another transaction capacity boost) and TumbleBit (an anonymous top-layer network).
  • Protects Lightning Network – SegWit is great for payment channels like the Lightning Network (LN), where a vulnerable signature originally prevented more people from using it to remit Bitcoin. 

Where is SegWit now?

In August 2017, Bitcoin finally integrated SegWit into its system. SegWit is called a “soft fork” which means it is compatible with Bitcoin’s old code, minimalizing the hassle to make SegWit work. A hard fork, in contrast, is a system that is so totally incompatible with the old that a separate blockchain and currency is needed to make it work. 

In SegWit’s case, all the system needed was 95 percent of Bitcoin miners to accept the changes, which happened in less than a year.

In 2017, Bitcoin came out with a controversial hard fork SegWit 2x which increased block sizes from 1 MB to 2 MB. Most of the crypto community resisted SegWit 2x due to its ambitious changes. Consequently, the hard fork was canceled only a week before it was scheduled to occur.

What are the main problems with SegWit?

For one, miners and mining pool operators dislike SegWit. Transactions that go through Lightning Network are in a separate channel (i.e., the parallel “line”), which means these transaction fees will not flow to miners.

Some Bitcoin services – like Bitcoin wallets – have been slow to support the SegWit changes. In February 2018, only 14% of Bitcoin transactions were made using SegWit Bitcoin. The numbers have improved since then, but the network is still in the woods.

Critics complain that SegWit doesn’t go far enough to solve the scalability problem. They maintain that only major changes to the Bitcoin platform and to the way Bitcoin handles transactions can decongest transaction flow.

Finally, SegWit has caused divisions in the bitcoin community leading to several hard forks, such as Bitcoin Cash (BCH).

bitcoin cash logo render

Overview

Bitcoin Cash was created as a result of a continuing debate in the Bitcoin community about how Bitcoin should scale to meet an expanding user base. Bitcoin Cash branched off from the original Bitcoin blockchain, and all work done previous to the split is just as much part of the history of Bitcoin Cash as it is part of the history of Bitcoin. Because of this shared history, and the disagreements that led to its creation, the status of Bitcoin Cash is hotly debated, with two sides deeply entrenched in their view.

Proponents of Bitcoin Cash believe that they preserved the original Bitcoin by forking off before other controversial changes were applied, mainly the SegWit side chain system. In their view, Bitcoin Cash conforms more to the original version of Bitcoin, and some even go so far as to say it is the true Bitcoin.

Opponents of Bitcoin Cash feel that it was a fork perpetrated by people looking to capitalize on Bitcoin’s success by creating what is essentially just another coin in the market, but unfairly leveraging the name recognition of Bitcoin.

Purpose

Bitcoin Cash has a very clear and simple goal, which is to be an everyday currency, used as commonly and frequently as any paper cash, credit card, or any other way people transact for goods and services. However, this goal does not exclude the possibility of being a store of value, as proponents of Bitcoin Cash believe that value ensues from the ability to conduct commerce. Also, as of mid-May 2018, Bitcoin Cash will have the ability to do smart contracts similar to what Ethereum can do, and previous to this, developers have already innovated different uses for the Bitcoin Cash blockchain, such as an on chain social messaging system. What turns out to be the most popular use for Bitcoin Cash may yet to be seen.

Technical

Bitcoin Cash is mined on the exact same hardware that Bitcoin uses, as they are both forks of the exact same code base. As such, Bitcoin Cash directly competes with Bitcoin for computing power. How much power is split between the two coins is determined by the price of the coins, which determines how profitable they are to mine. Currently, the majority of mining power goes to Bitcoin, as it has a significant price advantage. However, Bitcoin Cash has seen price gains approaching 20% of the value of Bitcoin. If it goes upward, and there is enough incentive for Mining to switch over to Bitcoin Cash, this could present a technical challenge for Bitcoin, as the difficulty algorithm that determines how fast blocks can be mined might not adjust in time to match less computing power being available. In such a case, the Bitcoin chain could see a dramatic fall in value, or even fail to be able to continue entirely. This is one reason Bitcoin supporters feel that Bitcoin Cash is an existential threat to Bitcoin.

Market

Except for a few very short-lived spikes, Bitcoin Cash has held a fairly consistent place as the fourth largest cryptocurrency by market capitalization. As of May 2018, it has closed the gap on Ripple, its price deviating slightly from the rest of the market, which usually tends to rise and fall together. Because of the controversy surrounding Bitcoin, there are those who apply a lot of meaning to its rise or fall, but while the two warring factions rally against the opposing side, hoping to see Bitcoin Cash rapidly become the de facto cryptocurrency or disappear completely, the market seems to have settled on a slow and steady progression that leaves neither side completely satisfied.

bitcoin cash

A miner has successfully recovered more than $600,000 worth of bitcoin cash mistakenly sent to SegWit addresses, and he or she intends to return the coins to their rightful owners — for a fee.

The decision to fork away from the main bitcoin blockchain and create bitcoin cash grew out of a yearslong debate about the appropriate way to scale Bitcoin. However, the timing of the fork was related to the impending activation of the Segregated Witness (SegWit) upgrade on the main network.

Consequently, the Bitcoin Cash network has not upgraded to SegWit, and bitcoin cash transactions get stuck when individuals mistakenly send them to SegWit addresses. These funds can be claimed — by anyone — but the process is technical, arduous, and requires mining hardware. Mining pool BTC.com had recovered 100 BCH and returned them to users, but as of yesterday more than 493 BCH — worth $609,000 — remained stuck in SegWit outputs.

Today, that 493 BCH is no longer stuck. An anonymous miner — known only by the handle “bchsegwitrecover” — revealed on reddit that he or she had successfully recovered the coins.

bitcoin cash
Source: Block Explorer

The miner struck an altruistic tone, stating that he or she had done this as a service to the community.

“Some of you may have noticed this transaction recently which spent 493.54495133 BCH that was stored in segwit outputs,” the post said. “I have taken all of these coins to help those that have mistakenly sent BCH to segwit addresses,” the post said.

Affected users can retrieve their funds by sending the miner a signed message from the address from which the coins were sent — as well as a signed message from the address from which they are recovering the lost funds — and he or she will return them to the owner. The deadline to reclaim the funds is December 5.

There’s a catch, however.

“Because of the significant effort that was required to both claim these BCH and to verify that each person is the person who should be receiving the BCH, I will be taking 30% of the BCH recovered as a recovery fee. This means that you will receive 70% of the funds that was stored with a segwit address,” the post continues.

This might seem like a steep fee. It amounts to more than $180,000 — more if some users do not reclaim their funds. However, as the funds are already in the miner’s possession, victims must choose between reclaiming 70 percent of their lost funds or losing them permanently. All things considered, they are lucky the miner is returning any coins at all.