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SegWit: Definition & How it Works

By Matthew Zeitlin · August 06, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

SegWit: Definition & How it Works

SegWit is an update to Bitcoin’s protocol that changed the way that the blockchain transfers information. Protocols are the rules that govern the way that Bitcoin and other cryptocurrencies work.

What Is SegWit?

SegWit is an example of the Bitcoin development community being able to solve a problem while still maintaining the integrity of the Bitcoin protocol and blockchain.

SegWit stands for “segregated witness,” and it’s a key turning point in the history of Bitcoin and cryptocurrency, and represents a fork in the road, or at least a fork in Bitcoin. The SegWit fork changed the rules, allowing for larger blocks and removing signature data from Bitcoin transactions.

How Does SegWit Work?

SegWit removes (or segregates) the signature (or witness) from the block, moving it instead to the back of the transaction. This frees up more space for the transaction itself.

What Problems Does SegWit Solve?

SegWit solves several issues with earlier versions of the Bitcoin protocol.

The Transactions Problem

The original Bitcoin protocol limits the size of “blocks” to a single megabyte. The whole Bitcoin network “confirms” a new block every ten minutes, with a few transactions taking place every second. These blocks and the confirmation process comprise the foundation of Bitcoin.

As Bitcoin scaled and got bigger and more miners, developers, and users became part of the Bitcoin community, a debate arose around the size of blocks. Should it increase beyond founder Satoshi Nakamoto’s original vision or stay the same?

If the community decided to make an increase, it would have to receive approval by consensus, or perhaps risk splitting Bitcoin apart into separate protocols.

The Malleability Problem

The Blockchain also had some security and efficiency issues, known as “malleability.” Prior to Segwit, every Bitcoin transaction included a “signature” that became part of the transaction confirmation. The signature, with the use of a private key, would become part of the block transfer, taking up space that could have been more Bitcoin transactions. Another word for these signatures is “witness,” and so was born the idea of Segregated Witness, or SegWit.

The theory behind SegWit held that Bitcoin transactions could be more efficient, more secure, and better recorded on the Blockchain itself. This would also allow for developers to build transfer improvements on top of the original Bitcoin protocol, leading to the development of the Lightning Network.

The Scalability Problem

One of the major issues addressed by SegWit was the so-called “scalability problem,” which refers to the issue with block sizes that can limit the speed and scale of transactions on a Blockchain network.

When Was SegWit Created?

The Bitcoin Segwit update took place on August 23, 2017 and changed the way information was transferred on the blockchain.

Prominent Bitcoin developer Pieter Wuille originally proposed the update in 2015 as a way to address a problem in the less-than-a-decade-old protocol that governed the cryptocurrency. He and others believed that transactions took too long to process and that they had some security issues.

There were two ways, known as forks, to address the problem.

A hard fork

A hard fork creates a new system all together. Bitcoin Cash is an example of a hard fork, which enabled large block sizes, but ultimately created a new network.

A soft fork

With a soft fork, the new system works with the old one. This is the option that developers used for SegWit, which became one of the most prominent and important Bitcoin forks. In the dispute between soft fork vs hard fork, SegWit’s successful adoption is a victory for the soft forks.

Recommended: Differences Between Bitcoin Soft Forks and Hard Forks

What Was Segwit2x?

Some prominent Bitcoin miners supported several approaches to the scale issue inherent in the original Bitcoin protocol. To move forward, they came to what’s known as the “New York Agreement,” a plan to implement SegWit and do a hard fork of Bitcoin to increase the block size limit. This was “SegWit2X.”

However, Bitcoin’s developers didn’t endorse the plan and it never reached the consensus necessary for a successful hard fork. These developers have huge sway over the greater Bitcoin community and without their support, a fork wouldn’t have enough takers to challenge Bitcoin in its present set-up. By late 2017, SegWit2X had collapsed and early the next year, SegWit was fully operational on consumer cryptocurrency platforms like Coinbase. And major crypto wallets, the hardware and software products that allow for safe crypto storage, had signed on to the SegWit update.

The failure of SegWit2x shows that even large Bitcoin mining pools, groups of miners that run the hardware that creates new Bitcoin, don’t have total sway over the Bitcoin community and can’t singlehandedly dictate its direction – or its forks. Bitcoin miners have tended to prefer Bitcoin changes that would increase the block size as opposed to segregating out signatures, since that would bolster the fees they get from the network for processing blocks. But the Bitcoin community is more than just its miners, and so their opinion only means so much.

Should You Use SegWit?

While the Bitcoin scalability debate is hardly over, for the time being, Bitcoin itself remains in the driver’s seat in terms of usage and developer activity compared to its rivals and hard forks.

By early last year, at least two thirds of transactions used SegWit, indicating that the soft fork “works” for many in the Bitcoin community. By the end of 2020, one of the last exchanges to hold out, Binance, announced that it would support SegWit.

There are several benefits to using Segwit for crypto transactions, including lower transaction fees and faster transactions.

The Takeaway

SegWit was a major upgrade to the Bitcoin protocol, and one that has helped accelerate widespread adoption of the cryptocurrency in recent years.

You don’t need to be an expert in the details of Bitcoin protocol to start investing in cryptocurrency, however. You can get started by opening an account with the SoFi Invest® brokerage platform.

Photo credit: iStock/BartekSzewczyk


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