Proposed by the Bitcoin Core team in 2015, SegWit was implemented to deal with the transaction malleability in the Blockchain, by segregating (separating) the digital signature of a transaction.
A major downside of the Bitcoin Blockchain was the fact that a transaction could be tampered while waiting in the backlog to be processed. SegWit improves the security of the network by isolating the malleable elements of the transaction in the segregated block. While the developers managed to accomplish this purpose, they identified that SegWit solved another issue as well. It decreased the size of transactions, enabling each block to virtually supporting the capacity of 4Mb, instead of 1Mb that the system is set to support.
A transaction in the blockchain consists of two parts, the header, and the body. While the header includes the hash code with the receiver’s details, the body contains the sender’s public address, as well as the digital signature that verifies the ownership of his funds. As the script of the digital signature takes up the most space (65%) in transaction size, SegWit introduces a new transaction system where the digital signature is placed in an extended block (witness) of a parallel side-chain, shrinking a transaction to a quarter of its original size.
Compatible with the original Blockchain, SegWit reduces transaction fees that senders currently pay to ensure that a transaction will be included in a block during network congestions and effectively eliminates transaction processing problems during high-traffic times in the Blockchain, by enabling a new block to contain four times more transactions than before.
SegWit makes the Blockchain more scalable, free of manipulation. When it was first presented, the Bitcoin Core team announced that the consensus of the supermajority (95%) of the miners would be required for the implementation of SegWit. Some miners opposed to the new concept, as they were about to lose significant benefits from the replace-by-fee system. In addition to the miners’ incentive issue, there was the ideological argument as well. By Implementing the third-party SegWit side-chain to keep the original network running, the foundation of decentralization is compromised.
As the Bitcoin network grows, there is a higher demand for fast transactions and low fees. SegWit was deployed in August 2017 to address those needs but was seen as a temporary solution. However, it laid the ground for the Lightning Network, a more scalable network, that eliminates the transaction fees for micropayments and enables the use of Smart Contracts in the Blockchain.
The Bitcoin community was torn after these developments, and several proposals were explored by Bitcoin experts, during the convention that was held in New York (late May 2017). To protect the community from splitting, the implementation of SegWit2x, or “The New York Agreement,” was decided, a hard fork on the Bitcoin’s Blockchain. The agreement consisted of two parts. Firstly, the required consensus for the SegWit would be reduced to 80%, and non-compliant miners would, gradually, be rejected by the Blockchain and second, the SegWith2x would be applied on the Blockchain three months after the deployment of SegWit, increasing the block size from 1Mb to 2Mb.
SegWit2x was planned to be released in November 2017. However, the controversy across the community and lack of consensus forced the developers’ team to cancel the launch and abandon the project. The main goal of implementing the hard fork would be to smoothly migrate all the Bitcoin users to the new chain, but the main priority would be to keep the community together. SegWit2x’s proponents see Bitcoin as a transactional tool and believe that the increased block size and lower transaction fees are vital for Bitcoin’s future. The opposed ones consider it as a storage alternative and claim that this combination will jeopardize Bitcoin’s security by discouraging miners to keep on mining, as higher computational power will be required, while the rewards will be diminished. The aforementioned debate led a group of developers to diversify and create Bitcoin Cash, a Bitcoin hard fork with 8Mb block size.