Bitcoin Begins Segregated Witness Era, What Happens Now?

Segregated Witness (or SegWit) was added to Bitcoin Core. Will it be the first step towards a mainstream-ready global decentralized digital currency?

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Bitcoin Begins Segregated Witness Era, What Happens Now?

Thursday, October 27th, 2016. Segregated Witness (or SegWit) was added to Bitcoin Core. Will that day be the official end of the two-year-old “Block Size Debate?” will yesterday be the first step towards a mainstream-ready global decentralized digital currency? Whether you know it or not, Bitcoin has officially stepped into a new era of expansion and usability with the release of Bitcoin Core 0.13.1. Here, we’ll give you a cliffnotes version of what happens next and if we are even ready for SegWit.

This can get uber-technical, but don’t worry. I’m not the one to lay out all the source code for you. What I can do is provide you with an understandable shorthand guide on how we all can start to enjoy its fruits, if we so choose to. And you see, Bitcoin’s 0.13.1 update doesn’t automatically activate SegWit for the world.

Let us review what SegWit is and how it's potential helps users going forward. First and foremost, it is capable of effectively increasing the effective block size or efficiency of each block by at least 60% over the current state, if not more.

This is how block capacity will improve, according to Bitcoin Core:

“Since old nodes will only download the witness-stripped block, they only enforce the 1 MB block size limit rule on that data. New nodes, which understand the full block with witness data, are therefore free to replace this limit with a new one, allowing for larger block sizes.

Segregated witness, therefore, takes advantage of this opportunity to raise the block size limit to nearly 4 MB, and adds a new cost limit to ensure blocks remain balanced in their resource use (this effectively results in an effective limit closer to 1.6 to 2 MB). People who run upgraded wallets will be able to take advantage of the increased block size by moving signatures to the witness section of the transaction.”

Claimed benefits

There are several claimed benefits, besides a noticeable block size adjustment. Ultimately, miners will benefit in any future hardfork that changes the block capacity limit to be a single weighted sum of parameters. This lets miners easily and accurately fill blocks while maximizing fee income. This will also benefit users by allowing them to more reliably calculate the appropriate fee needed for their transaction to be mined.

This should help smaller miners using SPV nodes to operate with less space and required bandwidth. The Lightning Network integration will be so much easier to implement once SegWit is adopted. The Network will be significantly more efficient in its use of space on the Blockchain. With third-party and scriptSig malleability removed, it also becomes possible to run lightweight Lightning clients that outsource monitoring the Blockchain, instead of each Lightning client needing to also be a full Bitcoin node.

Other benefits include making it easier for wallet providers to check the status of outgoing Bitcoin transactions. Smart contracts on the Blockchain can be easier to add, monitor and create. And removing the quadratic scaling of hashed data for verifying signatures makes increasing the block size safer in the future.

It is just an option, not a dictatorship

Let’s slow down. Now, no one is forcing anyone to adopt SegWit. This is not a dictatorship. There are checks and balances in play and a couple of groups need to help SegWit along. This is not an edict. Rather, It is an option and an exciting one that Bitcoin probably needs sooner rather than later, as blocks are running at or near capacity, slowing down transactions, and raising transaction fees.

The two groups that need to take SegWit to the next level are the miners and the “full nodes” that are keeping the Bitcoin protocol running for almost the last eight years. According to Bitcoin Core, this is what has to happen next, now that the newest Bitcoin release is fully SegWit-ready: “Miners representing 95% or more of the total Bitcoin network hash rate must signal support for SegWit in order to lock-in SegWit’s activation. Full nodes run by a reasonable number of users and business to validate the payments they receive need to be upgraded to Bitcoin Core 0.13.1 or another SegWit-compatible implementation in order to incentivize miners to follow SegWit’s rules after SegWit activates.”

So, it is not a slam dunk that SegWit will even be a part of Bitcoin’s future, even if it’s programming is now entered into its source code. It is being labelled a “soft fork” by Bitcoin Core and will need to be adopted by the vast majority to take effect. This introduction has been almost two years in the making, and the last year or so has been spent making it as easy to adopt as possible, for miners, nodes, users (Yes, the individual user can decide if they want to do a SegWit transaction), and being fully compatible with all means of Bitcoin wallets.

Effect on Bitcoin mining

By following BIP9’s upgrade parameters, miners can begin supporting SegWit on November 15th by joining to the 0.13.1 release, upgrading any equipment and software to SegWit-compatible versions and begin producing blocks containing SegWit’s BIP9 versionbit 1. Segwit is currently active on testnet and regtest, so miners may want to start there before going all-in.

So, think of it this way, in Presidential election terms. The voting rules to the SegWit have been set, the voting machines are in place, and the campaign platforms have been laid out for all to see. It really works like a voting referendum on a new stadium or drug law. By the end of November, we’ll know if this referendum will pass or fail, but things like The Lightning Network may never see the light of day if SegWit bogs down.

Also, keep in mind that blocks are just about full, and Bitcoin price is starting to take off, with prices predicted to go much higher as we head into the winter. Bitcoin transactions tend to accelerate in the winter months, and with prices rising, this effect may be intensified in the coming months. Something needs to be done about these blocks, and those who are against a full block size increase have an attractive option here.

Either way, SegWit is designed to give the Bitcoin Blockchain the room it needs to grow and allow for easier upgrades in the future. Here’s hoping Bitcoin enters 2017 with some breathing room, some new technology to tout, and a reason for the mainstream investor to believe in Bitcoin having a more user-friendly future.

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