What is SegWit? An introduction to Bitcoin's clever on-chain scaling approach

Segregated Witness (SegWit) represents a crucial technological advancement in Bitcoin's evolution, addressing fundamental scalability challenges that emerged as the network grew beyond its early niche market. When Satoshi Nakamoto originally designed Bitcoin, he imposed a one-million-byte capacity limit on each block, a constraint that proved increasingly problematic as Bitcoin's popularity surged. With blocks generated approximately every ten minutes and limited to processing around seven transactions per second, the network frequently experienced severe congestion, resulting in transaction backlogs of tens of thousands of transactions, elevated fees reaching tens of dollars, and processing delays spanning several days during peak periods. SegWit emerged as the solution to these critical performance bottlenecks, enabling faster transaction processing and reduced fees while maintaining network security.

Introducing SegWit

Segregated Witness technology was proposed in 2015 by Bitcoin developer Pieter Wuille alongside other Bitcoin Core contributors as a comprehensive solution to transaction processing speed limitations. The technology achieved official implementation through a soft fork on the Bitcoin network in 2017, immediately increasing the information processing capacity of individual blocks by 1.7 times. This represented a significant milestone in Bitcoin's technical evolution without requiring a contentious hard fork.

The adoption of SegWit quickly spread beyond Bitcoin itself, with major cryptocurrencies including Litecoin and Bitcoin Cash implementing the technology to benefit from its advantages. The primary benefits realized through SegWit adoption encompass three critical areas: expanded block capacity enabling more transactions per block, increased transaction speed through optimized data structure, and enhanced transaction scalability supporting future network growth. These improvements collectively addressed the most pressing concerns of users and developers regarding Bitcoin's ability to function as a viable payment network.

The technical principles of SegWit

Understanding SegWit requires examining the fundamental structure of Bitcoin transactions. Each Bitcoin transaction comprises two distinct components: basic transaction data and witness data. The transaction data records essential information such as account balances and transfer amounts, while witness data serves to verify user identity through cryptographic signatures. Users primarily concern themselves with core asset-related information like account balances, whereas identity verification, though necessary, need not occupy substantial space within the transaction structure.

The inefficiency in Bitcoin's original design stemmed from witness data—specifically signature information—consuming disproportionate storage space within transaction blocks, thereby impeding transfer efficiency and increasing packaging costs. In a typical Bitcoin transaction, the recipient fundamentally needs only confirmation that assets are available for transfer, not detailed knowledge of the sender's identity verification process.

SegWit's innovative approach involves extracting witness data from the main transaction information and storing it separately in a new structure. This segregation accomplishes multiple objectives simultaneously: it reduces the effective size of transaction data within the main block, allows more transactions to fit within the one-megabyte limit, and accelerates overall transaction processing. By isolating signature data, SegWit effectively optimizes how block space is utilized without compromising security or functionality.

The main advantages of SegWit

SegWit delivers multiple substantial advantages that collectively transform Bitcoin's operational efficiency and user experience.

Increased block capacity

Statistical analysis reveals that signature information can occupy up to 65% of available space within a Bitcoin transaction block. By implementing SegWit and segregating this witness data, the original block storage space becomes available for additional transaction information. This architectural change effectively increases block capacity without modifying the fundamental one-megabyte block size limit, allowing significantly more transactions to be processed within each block. The result is a more efficient use of limited block space, directly addressing the scalability challenge that plagued Bitcoin's growth.

Faster transaction rate

SegWit employs a layered data processing approach conceptually similar to Ethereum's layer-2 solutions, processing Bitcoin data in distinct layers to enhance transaction throughput. Following SegWit adoption, the Bitcoin transaction system concentrates greater computing power and larger storage capacity on processing actual transaction information rather than signature verification. This focused approach substantially reduces computational burden compared to the previous unified structure, theoretically increasing transactions per second (TPS) rate. Empirical data demonstrates that after implementing SegWit, the average cost per transaction has decreased significantly, reflecting both increased efficiency and reduced network congestion.

Favorable Lightning Network compatibility

The Lightning Network represents Bitcoin's most prominent layer-2 protocol expansion solution, specifically designed to address scalability challenges through off-chain transaction processing. The Lightning Network creates an additional network layer atop the Bitcoin blockchain, establishing payment channels that enable rapid, high-volume transfer transactions under any circumstances. This off-chain data processing complements SegWit's on-chain optimization, which prioritizes processing the most critical data directly on the blockchain.

By relieving pressure on the main Bitcoin blockchain, SegWit indirectly creates favorable conditions for Lightning Network implementation and operation. The separation of transaction data and signature data within SegWit's technical framework provides an additional security benefit: it completely excludes user signature data from certain transaction processing stages, eliminating possibilities for transaction malleability—a vulnerability where transaction information could potentially be tampered with before confirmation. This protection ensures that incorrect information cannot be permanently recorded on-chain and provides positive benefits for transaction information repair programs and future protocol expansions.

Furthermore, SegWit serves as a crucial precursor to Bitcoin ordinals technology, expanding limits on arbitrary data placement within transactions. This expansion enables inscriptions to be engraved on individual satoshis of Bitcoin. The Taproot upgrade built upon this foundation, creating systems that further facilitate storing arbitrary witness data and continuing to expand data limits in Bitcoin transactions, ultimately enabling the creation of Bitcoin ordinals non-fungible tokens that exist today.

How SegWit is applied

For ordinary users, SegWit technology delivers three primary practical benefits that directly impact daily cryptocurrency usage. First, SegWit addresses provide enhanced security compared to traditional addresses through improved cryptographic structures and malleability protection. Second, they enable faster transaction processing through expandable block capacity and accelerated transaction verification. Third, they significantly reduce transaction fees compared to ordinary wallet addresses, sometimes by as much as 35% compared to legacy formats.

Implementing this technology for everyday users is straightforward: by utilizing a SegWit-compatible wallet address to receive Bitcoin transfers, users automatically enjoy these benefits. SegWit adoption has continued to grow significantly over recent years, reflecting widespread recognition of its advantages among Bitcoin users and service providers.

Bitcoin address formats are primarily divided into several types, each with distinct characteristics:

Legacy addresses

Legacy (P2PKH) format addresses begin with the number 1, representing Bitcoin's original address structure still in use today. An example is 1Fh7ajXabJBpZPZw8bjD3QU4CuQ3pRty9u. P2PKH stands for Pay To PubKey Hash, indicating payment to a public key hash. While functional, these addresses do not benefit from SegWit optimizations.

Nested SegWit addresses

Nested SegWit (P2SH) format addresses beginning with 3 serve as SegWit-compatible addresses. An example is 3KF9nXowQ4asSGxRRzeiTpDjMuwM2nypAN. These addresses use Pay-to-Script-Hash (P2SH) packaging, enabling SegWit functionality while maintaining compatibility with older nodes that don't recognize native SegWit addresses. The P2SH format supports more complex functions than traditional addresses, most commonly used for multi-signature addresses requiring multiple digital signatures to authorize transactions. Addresses beginning with 3 enjoy wide support and can send Bitcoin to addresses starting with both 1 and bc1.

Native SegWit addresses

Native SegWit (Bech32) format addresses begin with bc1q, representing native SegWit addresses specially developed for optimized SegWit functionality. An example is bc1qf3uwcxaz779nxedw0wry89v9cjh9w2xylnmqc3. Defined in BIP173, Bech32-encoded addresses feature case-insensitivity (containing only 0-9 and a-z characters), effectively avoiding confusion and improving readability during input.

These addresses use Base32 encoding instead of traditional Base58, requiring fewer characters and enabling more efficient calculations and tighter data storage in QR codes. Bech32 provides superior security through optimized checksum error detection code, minimizing chances of invalid addresses. Being natively compatible with SegWit eliminates the need for additional space to embed SegWit addresses into P2SH addresses, resulting in lower transaction fees. Bech32 addresses offer several advantages over older Base58 addresses, including smaller QR codes, enhanced error resistance, improved security, case-insensitivity, and easier readability through exclusive use of lowercase letters.

For version 0 SegWit addresses starting with bc1q, Pay-to-Witness-Public-Key-Hash (P2WPKH) addresses maintain a fixed length of 42 characters, while Pay-to-Witness-Script-Hash (P2WSH) addresses maintain a fixed length of 62 characters. P2WPKH is typically used for ordinary addresses, whereas P2WSH is employed for multi-signature addresses.

A minor vulnerability was discovered revealing that if a Bech32 address's last character is P, accidentally entering one or more Qs afterward could still pass checksum verification without triggering an input error prompt. Fortunately, SegWit addresses have strict length limits of either 20 or 32 bytes, so entering extra Qs creates an invalid address exceeding the length limit, causing wallets to refuse the transaction.

Taproot addresses

P2TR (Bech32m) format addresses beginning with bc1p represent Taproot addresses, an example being bc1pqs7w62shf5ee3qz5jaywle85jmg8suehwhOawnqxevre9k7zvqdz2mOn. To address the Bech32 checksum vulnerability, a new standard called Bech32m was proposed in BIP0350. Bech32m implements a simple but effective change: adding an extra digit to the Bech32 checksum formula ensuring any additional characters generate an invalid checksum.

This new standard applies exclusively to Taproot addresses and future address formats, while version 0 SegWit addresses continue using the previous Bech32 standard, as they're already protected by 20 or 32-byte length limits. For version 1 native SegWit addresses (Taproot), Bech32m addresses always begin with bc1p, supporting BTC NFT holding and Ordinals NFT functionality.

The subtle differences between addresses

Examining fee efficiency across different address formats reveals significant cost variations that impact user experience and network economics:

• SegWit-compatible addresses (certain addresses starting with 3) save approximately 24% in transfer fees compared to traditional addresses (starting with 1)
• Native SegWit addresses (starting with bc1) save approximately 35% in transfer fees compared to traditional addresses (starting with 1)
• SegWit addresses (starting with bc1 and certain addresses starting with 3) can save up to 70% of transfer fees compared to multi-signature addresses (certain addresses starting with 3)
• Taproot addresses support BTC NFT holding and Ordinals NFT with transfer fees similar to addresses starting with 3

These differences reflect the varying efficiency of each address format in utilizing block space and processing transactions, with newer formats generally offering superior cost-effectiveness alongside enhanced functionality.

Conclusion

Segregated Witness represents a landmark development in Bitcoin's evolution, successfully addressing critical scalability limitations while maintaining backward compatibility and network security. By segregating witness data from transaction data, SegWit increased effective block capacity by 1.7 times without modifying the fundamental one-megabyte block size limit, demonstrating elegant problem-solving through architectural innovation rather than contentious protocol changes.

The SegWit technology delivers concrete benefits across multiple dimensions: enhanced block capacity enabling more transactions per block, faster transaction processing reducing confirmation times, significantly reduced fees improving economic accessibility, and elimination of transaction malleability vulnerabilities strengthening security. Beyond these immediate improvements, SegWit established essential groundwork for advanced scaling solutions like the Lightning Network and innovative applications such as Bitcoin ordinals and NFTs.

Widespread adoption by major cryptocurrencies including Bitcoin, Litecoin, and Bitcoin Cash validates SegWit's effectiveness and importance. Modern cryptocurrency infrastructure has fully integrated SegWit support alongside Taproot addresses, enabling users to benefit from optimized transaction processing, reduced fees, and access to emerging Bitcoin-based applications. As Bitcoin continues evolving to meet growing demand, SegWit stands as a crucial milestone demonstrating how thoughtful protocol improvements can achieve substantial performance gains while preserving the fundamental characteristics that make Bitcoin valuable and secure. Understanding SegWit remains essential for anyone seeking to optimize their Bitcoin transaction experience and leverage the full capabilities of modern Bitcoin infrastructure.

FAQ

What is SegWit in Bitcoin?

SegWit (Segregated Witness) is a Bitcoin upgrade that separates transaction signatures from data, increasing transaction speed and block capacity. Implemented in 2017, it addresses scalability issues.

Can I send BTC to a SegWit address?

Yes, you can send BTC to a SegWit address. The transaction will be processed normally, as SegWit addresses are fully compatible with regular Bitcoin transactions.

What is the difference between BTC and SegWit?

BTC SegWit offers lower transaction fees than standard BTC. SegWit addresses are needed for SegWit transactions, but not all exchanges support them.