The creation of SegWit resulted from the objective of growing the Bitcoin blockchain's transactional capability.
In August 2017, SegWit was integrated into the Bitcoin network and had a huge influence on Bitcoin and the wider marketplace of cryptocurrencies.
One of the key outcomes of the SegWit implementation was that a group of developers created a hard fork in the Bitcoin blockchain and formed a new cryptocurrency, Bitcoin Cash, which was also released in August 2017, which disagreed with the plan.
Background
Blockchain networks allow people, without the assistance of a third party, to conduct transactions with each other.
By employing public key cryptography, they do this.
A user on the blockchain has a public and private key, and a digital signature is created by combining the two keys, which verifies the identity of the user when making a transaction.
When Person A adds transaction data to Person B's public key, transactions on the blockchain are performed.
To create his digital signature and complete the transaction, Person A uses his private key.
Blockchain networks have network-based structures, and the transaction and its related details are transmitted to any device and user on the network if a transaction happens, which produces a distributed ledger: a shared database of all network transactions for all users to see.
Upon documenting the transaction on the network, users validate the transaction on the blockchain, the digital signature of the entity and the transaction details, and the block is added to the network.
Issues
The issue with this method is that it needs substantial data to build and validate blocks.
The digital signature generation absorbs the majority of the data in a transaction, about 65 percent.
Since blocks on the Bitcoin blockchain were restricted to only 1 MB of space, this data usage issue presented a specific problem for Bitcoin.
All those blocks were piling up as more and more transactions happened on the blockchain.
This size restriction has become a growing problem for Bitcoin in the past several years, as the number of users on the Bitcoin blockchain has risen and other blockchains have introduced alternatives to Bitcoin.
Since the blocks on the chain could not be larger than 1 MB, the number of transactions that could be performed on the blockchain had major restrictions, just around one every seven seconds.
This will hinder the scalability of Bitcoin and its potential as a high-volume payment scheme.
In the Bitcoin blockchain, a further problem was malleability.
Malleability allowed users on the blockchain to change the transaction ID information slightly before the transaction was validated on the network.
This did not pose a major problem for Bitcoin, but it stopped smart contracts from being enforced by the network.
The failure of Bitcoin to produce smart contracts threatened to become an additional problem for the future growth of Bitcoin, as the Ethereum network has gained popularity and value, particularly because it allows smart contracts and industries outside the cryptocurrency marketplace have taken an interest.
Solution
In 2015, Dr. Pieter Wuille proposed a solution to this scalability issue for Bitcoin at the Scaling Bitcoin Conference.
Dr. Wuille put forward an idea called Segregated Witness, recognizing that the digital signature and transaction data merged to form the data on a block and that the digital signature consumed the greater amount of data.
By eliminating the digital signature from the transaction data and transferring it to a point in the structure later in the transaction, Dr. Wuille's idea was to minimize the data involved in a transaction.
This will raise the block size cap from 1MB to 4MB, thereby raising the frequency of transaction data and enhancing the Bitcoin blockchain's scalability.
The principle of segregating the digital signature date from the transaction data gives Segregated Witness its name.
Since users on the blockchain check, or 'witness', the digital signature of a person, if the transaction data is separated from the digital signature, what is witnessed is essentially separated from the transaction data.
Implementation
Dr. Wuille's idea was accepted by a majority consensus of users on the Bitcoin blockchain, and work started on this new method.
Less than two years after he proposed the concept, Segregated Witness was incorporated into the Bitcoin blockchain in August 2017.
SegWit is a soft fork, a transition in a blockchain in which the transactions on the new blockchain can be accepted by nodes on the old blockchain, so that they can obey the new protocol while respecting the old one as well.
This ensures that transactions on the blockchain can still be checked by Bitcoin blockchain users who have not upgraded to the latest protocol.
Bitcoin cash was born
While the Bitcoin network had a majority consensus on SegWit, not all developers agreed with it.
A group of developers decided to simply increase the size of the blocks on the network rather than strip the digital signature from the transaction data.
So they've done.
"In August 2017, these users conducted a "hard fork" fork on the network and created Bitcoin Cash when SegWit was deployed as a soft fork on the Bitcoin blockchain.
A hard fork is a modification to the original blockchain that renders it incompatible with the new blockchain. The nodes on the new blockchain will not communicate with transactions or nodes on the old blockchain with a hard fork or accept them.
Bitcoin Cash's creation is probably the most important hard fork recently, especially because it was connected to Bitcoin, the highest profile and most valuable cryptocurrency.
Benefits of SegWit
SegWit has made it possible to increase the data size of blocks on the Bitcoin blockchain from 1MB to 4MB. This increase in block size has caused the frequency of transactions on the network to increase.
An additional advantage of removing the digital signature from the transaction data and reducing the transaction's data size is that more transactions can fit into a block.
Thus, not only are the block sizes bigger, but more transactions will take place in the block, causing the volume of transactions to increase even more.
In addition, SegWit accomplished its goal of solving the issue of malleability on Bitcoin. Users will no longer modify the specifics of a transaction ID.
This facilitated an increase in development work on features that would allow smart contracts to be executed, which are increasingly valuable to many industries in the wider digital marketplace because of their advantages.
Implementation Issues
While SegWit was rolled out in August 2017, it was not immediately enforced.
SegWit was used to make a minority of transactions on the blockchain (less than 25 percent).
SegWit is an option but not required for transactions.
A bigger problem facing SegWit was that, although the protocol was introduced in August 2017, it was not endorsed by many digital wallets. To allow it, it took time for well-known wallets, like Trezor and Ledger. Until February 2018, Coinbase did not endorse SegWit.
Although there have been problems and controversy about SegWit in the Bitcoin network, its creation provides a clear illustration of how blockchain networks may develop.
SegWit has demonstrated how developers can build a protocol on a blockchain network to optimize a blockchain network for technical advances and the changing marketplace.
It has also shown how developers can build a hard fork on a blockchain in response to the new protocol in the same network.
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