SegWit, short for “Segregated Witness,” is an important protocol upgrade for the Bitcoin network which was implemented in 2017 to improve scalability, block size limit, and deal with some issues such as transaction malleability.
Here’s how it works and why it’s important:
- Transaction Malleability Fix: Before SegWit, transaction IDs could be changed before they were confirmed on the Bitcoin network. This “transaction malleability” was problematic for businesses that operated with Bitcoin. By removing certain parts of the transaction data and changing how the transaction ID is created, SegWit provided a fix for transaction malleability.
- Increased Block Capacity: Bitcoin has a block size limit which, before SegWit, was 1MB. This limited the number of transactions that could be included in each block, and thereby limited the scalability of Bitcoin. SegWit changed the way data in a block is counted; the “witness” data is considered separately, and this effectively increases the block size without a hardfork, allowing more transactions to be included in each block. The theoretical limit is about 4MB, but in practice, blocks tend to be a little over 2MB due to the nature of transaction data.
- Enabling Future Upgrades: SegWit also made it easier to implement future upgrades to the Bitcoin network, such as the Lightning Network and Schnorr signatures, which require the transaction malleability fix that SegWit provides.
The implementation of SegWit was somewhat contentious within the Bitcoin community, and disagreement over this upgrade was part of the reason for the Bitcoin Cash hardfork. However, since its activation, SegWit has seen increased adoption and has generally been successful in achieving its goals.