Pin It

SegWit and the Future of Bitcoin

Bitcoin SegWit

Bitcoin has a scaling problem.

When the cryptocurrency software launched in 2009, the nature of the blockchain technology on which it was built meant that there was a hard cap on the total amount of transactions that could be processed in a given amount of time. In the past eight years, the basic technology hasn’t really changed, but the user base has grown so large that the Bitcoin network is struggling to handle the transaction volume, and unless something changes, this issue will only get worse over time.

Blockchain technology was designed by the anonymous developer(s) of Bitcoin and has come to be a core technology in almost all cryptocurrencies today. The Blockchain is a public ledger where all Bitcoin transactions are recorded and bundled into 10-minute blocks which are limited to a maximum size of 1MB. The scaling problem is the result of this size limit; Bitcoin has become so popular that it can no longer process all the transactions made within any given 10-minute period.

The Solution

To address this problem, developer Pieter Wuille has introduced to concept of SegWit, short for Segregated Witness. SegWit addresses Bitcoin’s scaling problem by “segregating” the transaction signature (the “witness”) from the input data. In short, signatures, which validate transactions, would be stored separately from the blockchain. This will free up more space within each block to store more transaction data and help streamline transaction processing.

Since signatures make up about 65% of the size of the input data, removing them can increase the effective block capacity by more than double. On top of that, SegWit also solves the problem of transaction malleability, a minor security flaw which makes it possible for hackers to change the signature of a transaction before the block is confirmed, which invalidates any later transactions in the chain.

SegWit2x

The trouble with SegWit is that this still may not be enough to completely fix the problem. Bitcoin is growing so rapidly – now with over 10 million users making hundreds of thousands of transactions per day – that even doubling the capacity of a block is only a temporary solution. This was pointed out by the Bitcoin mining community, who took a stance against the developers, favoring a hard fork over the latter group’s proposed solution.

A hard fork is what happens to a blockchain when a new rule chain is introduced to the software that makes it incompatible with the previous version. For example, to upgrade the Bitcoin network in order to allow block sizes to increase from 1MB to 2MB would create a hard fork.

After some debate, the two parties have agreed to a compromise called SegWit2x, with the mining community agreeing to Segregated Witness in return for the execution of a 2MB hard fork within 6 months of SegWit implementation.

Litecoin

However, SegWit2x may be too little too late. Ironically, the sheer popularity of Bitcoin, which led to the scaling problem in the first place, meant that there were too many interested parties that needed to agree to the upgrade, causing the execution of SegWit to be delayed (it was originally suggested in 2015). Bitcoin competitor Litecoin recently executed the SegWit upgrade to their blockchain.

Litecoin, even though it is the 5th largest cryptocurrency by market capitalization, is smaller than Bitcoin and therefore in a better position to adapt to the latest technologies available. Franklyn Richards, Litecoin Foundation director, initially admitted that the implementation of SegWit could serve as a test for Bitcoin, but the announcement in late March caused such a renewed interest in the Bitcoin competitor that Litecoin’s value tripled during the month of April and has doubled again since then, growing from roughly $5 USD to around $30.

This success has led many to speculate that Bitcoin missed their opportunity to capitalize on SegWit, leading segments of the cryptocurrency community to abandon the most popular coin in favor of newer, more innovative options.

The Future of Bitcoin

Bitcoin was originally developed with the goal of creating a decentralized currency, free of influence from political forces and the banking industry, and grew popular because of those ideologies. While it’s necessary for the developers of Bitcoin to make changes in order for the currency to survive, many Bitcoin enthusiasts believe that the proposed changes give too much power to the Bitcoin Foundation, thus making the currency no longer decentralized. If Litecoin or another altcoin develops a better way to solve the scalability problem while maintaining decentralization, it may spell the end of Bitcoin as we know it.

The power of digital currencies in today’s economy cannot be understated, as more people and companies invest in cryptocurrencies and retailers large and small begin accepting them as forms of payment both online and in-store. To learn about some of the leading Bitcoin competitors, check out our Beyond Bitcoin series:

Visit the Payza Blog regularly as we will be following cryptocurrencies closely in 2017 and follow us on Twitter and Facebook for e-commerce news from around the web.

  • chrislinn

    Great Post and Love This…!!! Thanks For Sharing.