A Bitcoin Improvement Proposal (BIP) that aimed to fix transaction malleability on Bitcoin.
Segwit is a soft fork upgrade to the Bitcoin network, meant largely for mitigating scalability problems by increasing block size limits on its blockchain. SegWit works by removing signature data and reducing the size of the transactions, allowing more transactions to be included in the same block.
SegWit was activated in August 2017 after being put forward by Bitcoin developer Peter Wiulle during a Scaling Bitcoin conference in 2015. Its literal meaning is “segregation of transaction signatures” and the implemented update created the idea of UASF, which means user-activated soft fork.
The reason for SegWit’s implementation was straightforward. The Bitcoin blockchain is very slow by modern standards, processing only seven transactions per second (TPS). When Bitcoin prices skyrocket, the transaction activity on the network increases, causing network congestion, higher fees and very long processing confirmation periods.
To speed up confirmations, SegWit modifies the mechanism to not include signatures, which form 60% of a transaction.
Since a Bitcoin transaction contains inputs and outputs, whereas the input is the sender’s address and output is the receiver address, the digital signature is included to verify the solvency of an account. SegWit removes the signature from input and moves it to the end of the transaction.
It also provides a security fix, as the input transaction ID could be modified to fraudulently receive Bitcoin from the sender. Since the signature is moved essentially to the end of the transaction, the transaction identity can’t be tampered with.
A further SegWit proposal called SegWit2x aimed to not only change transaction batching, but also increase Bitcoin’s block size from 1MB to 2MB. However, as SegWit2x required a hard fork and was a more fundamental change to the Bitcoin protocol, the developer community could not reach consensus and ultimately the proposal was abandoned.