What is SegWit and how it affects pricing of transactions

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2017 was a massive year for Bitcoin and cryptocurrency in general, not only did we see the value of cryptocurrency skyrocket, but we also saw the transaction costs of Bitcoin hit the sky. The average fee was north of $50 in late December, and the investors were left to amusement. This resulted in the adoption of SegWit which then led to a reduction of the costs by as much as 50 percent before it started rising again.

What is SegWit?

SegWit stands as an abbreviation for Segregated Witness and is the most significant protocol update since the inception of Bitcoin itself. The new technology addressed some of Bitcoin’s vital issues including the transaction costs. The considerable change was a result of changing the block size limit to block weight limit which completely rearranges the data placement in the Bitcoin blockchain’s witness blocks. This ultimately allows a higher number of transactions to pass through the network at any point in time. Additionally, the security and the efficiency of the protocol are improvised that helps with the long-term scalability of Bitcoin.

SegWit addresses generally differ from traditional Bitcoin addresses and start with the number 3, most legacy addresses usually begin with the number 1 and are commonly used by a considerable number of wallets, exchanges and other companies. SegWit was implemented by CoinGate in December 2017, and they state seven critical reasons for their adaption of the protocol. Firstly, SegWit has been comprehensively tested, and it allows up to four times more transactions per block while also significantly improving Transaction Malleability. It also eases the upgradeability to the Lightning Network and makes the hardware wallets more secure. The SegWit protocol makes Signature Hashing more efficient, and levels out the Bitcoin mining field as the miners can no longer use AsicBoost.

Despite the implementation of SegWit, which boosts the average block size and paves the way for the secure lightning network, the change didn’t make the benefits immediately possible. A caveat missed by most is that it will likely take some time before the technology has a noticeable impact on network capacity. It is entirely up to the users and the companies to harness SegWit, as most bitcoin users depend on a software wallet to make transactions, the users need to wait for the wallets to add the technology before they can make use of the SegWit technology. While the majority of bitcoin companies have pledged to add support, few developers are waiting to add support for security reasons, and developers argue that it is safer to test the technology further once it’s live before opening the gate to their users.

Where it might all get problematic is based on how long the different network participants will give the network to adopt SegWit. The biggest issue is how quickly the manipulated bitcoin’s capacity issues have been in the past, even after several months of campaigning on the idea that SegWit would redefine the calculation of the block size, there always remains a contingent which believes that this metric is key to scaling.

It is expected that once SegWit is online, the transaction costs could go down significantly and this should rive the usage of Bitcoin up leading to an increase in the value. It is also likely that the Lightning Network could be turned on at some point and this should make Bitcoin viable for microtransactions in a way unseen before.

Although SegWit was first introduced in August of 2017, it was not until the first week of January 2018 that it became widely adopted. The slow start was very much necessary to allow most wallets to facilitate the adoption of the change in the protocol. According to the experts, post the widespread adoption of SegWit, bitcoin will be moving closer toward utilizing two to four megabytes of transactions for every 10 minutes while SegWit implementation, although slow, averages close to 1.1 megabyte that explains eh slow speeds users are currently experiencing.

SegWit protocol is also compatible with the older versions of Bitcoin and most likely even with the supporting future growth and upgrades of the system. SegWit now remains as a critical aspect of the Bitcoin blockchain for the near future and with more embracement of the technology the transaction fees are bound to reduce further.

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