What are SegWit and SegWit2X
The tool to make a blockchain run faster is an alternative to the larger block size. But what is SegWit and what can it do for both Bitcoin and Litecoin?
The last few months revealed the problem of scalability with cryptocurrencies. As demand and transactions increased, Bitcoin showed a decrease in speed and need to pay larger miner rewards to push a transaction to be included in a block. For more information on blocks and the blockchain, read our guide on Blockchain Transaction.
SegWit, or Segregated Witness
When you send a transaction over the blockchain, it comes with a lot of various and sundry data, all used at different points in the transaction life cycle. SegWit is a technique to separate part of the transaction data and verify them separately, so that a transaction is approved faster.
Imagine passengers waiting for a bus, each with a large piece of luggage. Now imagine taking that luggage and putting it in a different compartment. That way, you can fit more passengers, and you won't need a double-decker bus.
The alternative solution to SegWit is to increase block size and fit in all the data for a transaction. Bitcoin cannot do that; it has a 1 MB cap on transaction size. But Bitcoin Cash chose to do it, and fit in data without SegWit into 2MB blocks.
How SegWit is Activated
All improvements and changes on the Bitcoin or other networks are just pieces of code. If they run and perform as required, the network will have different rules. All proposals have developers behind them, differing in opinion and competing for adoption. Users, miners and other developers have various reasons to support one team over another and one piece of code over another.
SegWit is activated when a miner decides to support the software update and from that moment onward, builds the blocks with the data separated. A blockchain can work if not all nodes support SegWit. In the case of Bitcoin, for months various miners and mining pools would have to state their support for SegWit explicitly. When 95% of nodes signal support, this means a network has adopted SegWit. Some proposals have an 80% consensus requirement to activate.
Litecoin adopted SegWit back in May 2017, with great support.
But for Bitcoin, the activation of SegWit was a battle that in the end led to a split in the blockchain, spawning Bitcoin Cash. The rest of the Bitcoin blockchain slowly moved toward SegWit, and as of the end of August, the adoption is complete.
SegWit and Market Price
So far, the activation of SegWit has been good news for the market price of coins. The faster and easier transaction promise propped up Litecoin and moved it upward sharply from its stagnant levels in May.
It is still early to say if Bitcoin would have a similar price increase, as most of the news around SegWit has already been discounted. And Bitcoin is also moved by different price pressures, so SegWit cannot be singled out as a factor.
Other SegWit Tokens
Vertcoin and Viacoin are two more tokens that established the SegWit approach. For Vertcoin, an older token, the SegWit effect saw the price rise ten-fold.
SysCoin was also one of the first to take up SegWit at the end of March. And in that case, the price rose 10 to 20 times at the peak. Currently, SysCoin is at $0.16, out of the sub-penny range at the end of 2016 and the beginning of 2017. This happened despite the technical issues that SysCoin had with the adoption of SegWit.
- source: coinmarketcap.com
Viacoin was the latest to adopt SegWit, active since August 3rd. But Vertcoin was already rising multiple times even before the SegWit news, moving from $0.03 to above a dollar.
- source: coinmarketcap.com
What Comes After SegWit?
SegWit was first a litmus test for the ease of consensus in the community around each coin. It revealed fault lines in the Bitcoin supporters pool, and it revealed the easier agreement of Litecoin supporters. SegWit may act like a practice run for other improvements and updates.
Technologically, it opens the door to the still experimental Lightning Network, a system for transactions a million times faster than current levels. There are only test wallets for small transactions, and the Lightning Network may be slow in arriving in its full form.
For Bitcoin, the conservative approach to SegWit is not considered a flaw, but a feature- the conservatism and slowness of the Bitcoin network are a part of its security system. Bitcoin has always stressed the importance of decentralization, and pushing updates centrally would deprive the network of its self-regulatory mechanisms. So for Bitcoin, SegWit adoption has been a hard-won victory.
What is SegWit2X?
This is a proposed path for Bitcoin to adopt SegWit, followed by a scheduled increase in block size to 2 MB. It is also known as Barrycoin, New York Agreement, BTC1.
This proposal is still in the pre-adoption stage, as only a part of miners and mining pools are signaling support. The full move to SegWit2X is expected in November and would require a hard fork with new rules for the network. But this won't be a hard fork of the type that created Bitcoin Cash.
There were many competing approaches to making the Bitcoin network faster. One of the proposals was BIP148, which would become moot given SegWit support.
Bitcoin Network Updates
There are other competing updates, but it is hard to know how the network will look. The final version of the code that runs and is accepted depends on miners and users agreeing over time- or causing another blockchain split. The final timing and effect of Bitcoin updates are not a given. Bitcoin is decentralized and adopting updates may happen early, late, chaotically, enthusiastically, users and miners may drag their feet- anything is possible.
What can you do as a user? Keep your Bitcoin safe and your wallets updated. Best keep your Bitcoin where you have access to the private key. Use the latest version of nodes or wallets on your computer. You may track support for various updates here. But in general, there is little that a user can do, except wait and see the direction that Bitcoin takes.
There is a live mailing list with updates on SegWit2X and the state of the Bitcoin network here . You may track the discussion to glean indications of consensus or disagreement. All changes to the code have their supporters and critics.
But meanwhile, Bitcoin as an asset may move its price with a very different logic.