Bitcoin traders can finally take advantage of long-awaited SegWit technology. Two prominent exchanges, Coinbase and Bitfinex, have started to support this promising technology that is expected to reduce transaction fees and improve transaction speed.
Bitcoin, the most famous of the cryptocurrencies, have enthusiastic traders all around the globe, primarily due to the fact that the governments and central banks can’t interfere with how cryptocurrencies work. The popularity could be seen clearly when Bitcoin (BTC) price skyrocketed to US $ 20,000 in December 2017. However, you still can’t pay for your coffee with Bitcoin, because the cryptocurrencies in general are not yet suitable for day-to-day financial transactions.
For Bitcoin to compete with credit cards, the following need to be addressed:
- Scalability: As of January 2018, only 7 Bitcoin transactions could be executed per second. As recently as February 19th 2018, it took 116.2 minutes to confirm a Bitcoin transaction on an average. Compare this with over 1,000 transactions per second with credit card, and you know why you can’t use Bitcoin for day-to-day transactions yet!
- Transaction fees: As of January 2018, transaction fees for Bitcoin were as high as US $ 25. Again, this doesn’t compare well with low-cost credit card transactions. The issue of transaction fees is directly related to the scalability issue. A block in the underlying blockchain of Bitcoin is of 1 MB size, and transactions contained in 1 block are processed every 10 minutes. Due to high competition to get the Bitcoin transaction through, the users pay fees to the miners, and block size limitations have raised the transaction fees over time.
Additionally, Bitcoin also has to contend with Malleability issues. What is malleability? Encryption is about converting a plain text into scrambled ciphertext, using a secret unique key. Decryption is the process of converting the ciphertext into plain text, again using the same unique key. If, during transit of the data, an attacker can convert the ciphertext into another ciphertext, which will then be decrypted into another related plain text, then the encryption algorithm is malleable. The attacker doesn’t even need to know the original plain text. Using malleability of the encryption algorithm, the attacker can change the payable-to address or the payable amount of a financial transaction, to illustrate just one example.
SegWit provides solutions to Bitcoin‘s scalability and malleability issues:
Segregated Witness i.e. SegWit resolves the scalability and malleability issues of Bitcoin in the following ways, while improved scalability will reduce the average transaction fees:
- SegWit brings a new structure named witness into the equation, and this is committed to the block differently. This new structure won’t have the data needed to determine the effect of the transaction. It only has the data required to validate whether the transaction is authentic. The signature will be moved to this new structure, and will not count towards the 1 MB block size.
- Unlike the traditional block size parameter, SegWit introduces a new parameter called weight, whereas a block can have a maximum of 4 million weight units (WUs). 1 byte in the original 1 MB block is equivalent to 4 WUs. However, this is different for the newly introduced witness structure, where 1 byte will be equal to 1 WU only. Effectively, the blocks will now be larger than 1 MB.
- Notice how the existing rule of the protocol stipulating 1 MB block size is not violated, rather it’s bypassed using a witness structure and WUs. This ensures that no hard fork is needed to implement SegWit, and backward compatibility is taken care of.
- With effective increase in block size, more transactions can be included in the block, thereby improving scalability, and reducing transaction fees.
- Even if an attacker changes transaction data, with the signature now moved to a separate witness structure, the attacker can’t change that, which addresses malleability issue.
Formally known as “Segregated Witness (Consensus layer)“, and originally introduced as Bitcoin Improvement Proposal (BIP) 141, SegWit can also work for Litecoin, DigiByte, and Vertcoin cryptocurrencies. The technology was first proposed in 2015, and much debate has taken place about adopting it. Bitcoin community was divided, and Bitcoin Cash (BCH) was created by the camp that didn’t want to use SegWit. SegWit was activated on August 24, 2017, and by early 2018, the adoption rate was 10-14%. Many hard and soft wallets have started to support SegWit. However, with two big exchanges, i.e. Coinbase, through their exchange GDAX, and Bitfinex, starting to support SegWit addresses, the adoption is expected to get a big push now. These two exchanges account for 10% of global Bitcoin trade together.
