SegWit Lock-In: What Does it Mean for Bitcoin?

On August 9, the highly-anticipated Segregated Witness (SegWit) protocol upgrade to the Bitcoin blockchain was officially locked in on block 479,707. While there is still a two-week waiting period before SegWit will be fully activated, the lock-in means that all bitcoin mining operations have to implement this update now or else they will have to give up their bitcoin mining income going forward. The two-week waiting period gives Bitcoin participants the time to upgrade their systems to the new software and will be finished around August 22.

The move of the Bitcoin community to implement SegWit, which also led to the hard fork that created the new altcoin bitcoin cash was welcome by the majority of the community as well as investors who witnessed the price of bitcoin rally to new all-time highs.

What Does the SegWit Implementation Mean for the Bitcoin Network?

SegWit’s most prominent feature and the key reason why it was implemented to tackle Bitcoin’s scalability challenges is that it increases the effective block size but does so without increasing the block size limit. SegWit does that by removing signature data in each block to increase the amount of transactions that can be processed. That means that the Bitcoin blockchain can process more transactions per second than it was able to before. Jimmy Song provides a useful analogy of signing checks and putting them into boxes to illustrate the mechanics of SegWit:

“Remember how the signature is about 50 percent of the transaction? SegWit cuts the checks in half and sends everything but the signature to everyone that’s accepting the old, smaller box. We send the larger boxes to everyone that’s accepting the new, larger box. Given that the checks are half the size for the smaller boxes, we can fit about double the number of checks in the smaller boxes, increasing throughput.”

The SegWit protocol upgrade also provides several other improvements to the Bitcoin network.

Firstly, it eliminates the issue of transaction malleability, which was the original reason why SegWit was actually first proposed back in 2015. Transaction malleability refers to when a user changes the ID of a signed transaction before it is confirmed by the network at which point he or she could then claim a transaction was made that never occurred. This is something that has been an issue for bitcoin exchanges, including for the now defunct Mt.Gox exchange.

Secondly, SegWit allows for script versioning, which refers to the ability to make additions and updates to the code that are non-contentious. It does this by adding a version number to future network adaptations. This will allow Bitcoin network participants to opt-in or opt-out of new upgrades such as sidechains, the Lightning Network or Schnorr signatures without the risk of a hard fork.

Thirdly, the Bitcoin blockchain also receives a security boost in the form of the pay-to-script-hash (P2SH), which increases the security of multi-signature transactions through an upgrade of the cryptography used in Bitcoin’s blockchain.

Additionally, linear scaling of sighash operations is being introduced, which augments the manner in which transactions signatures are computed so that each byte only needs to be hashed twice instead of four times. This allows for better scaling opportunities without jeopardizing security.

Once SegWit activates, the Bitcoin development community will move onto privacy-enhancing upgrades such as MAST. Litecoin, which has already implemented the SegWit upgrade, is currently pursuing MAST, which stands for ‘Merkelized Abstract Syntax Trees,’ and will improve privacy, scalability and transaction speeds.

The Next Hurdle Comes in November

While the majority of the Bitcoin community is rejoicing at the (so far) successful implementation of SegWit and a fresh all-time high in the price of bitcoin, the cryptocurrency is not entirely out of the woods yet.

As part of the so-called New York Agreement (also known as SegWit2x), which was signed by a large number of bitcoin startups and mining operations, a contentious proposed hard fork that would increase the block size of the Bitcoin network from one megabyte to two megabytes is scheduled for late November.

However, for this implementation to occur, the vast majority of miners would have to agree to this and mine the larger blocks. So far, it seems that this proposed hard fork looks rather unlikely as it is not gaining enough support from network participants.

What Does This Mean for Bitcoin Users?

For now, an activation of SegWit will likely mean faster and cheaper bitcoin transactions in the near future. However, further scaling solutions will be needed if the Bitcoin network continues to grow at the pace it has in 2017.

SegWit will also most likely mean new payment channels such as the Lightning Network and sidechains, which could improve the “translation friendliness” of bitcoin. In the distant future, once SegWit is activated, we will see interoperability between cryptocurrencies with SegWit through so-called ‘atomic swaps.’

In terms of the day-to-day use of bitcoin for online payments, remittances and as an investment, nothing notable will change in the near future.