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SegWit is not so black as it’s painted


The hype around the SegWit update has undoubtedly been one of the key market topics during the past month. The beginning of August was already marked with Bitcoin segregation into two cryptocurrencies, Bitcoin (BTC) itself and the new Bitcoin Cash (BCH). The SegWit was implemented at the end of the month, on 24th of August.

What was the market waiting for?

The segregation was preceded with grim forecasts: the total BTC annihilation, the big exchange rate drop and other nightmarish scenarios. The messy closing of BTC-e and following events didn’t improve the overall atmosphere. And other trade platforms started to experience technical difficulties before the SegWit introduction. The time has shown that the fears were baseless. Bitcoin has, indeed, fallen… just to skyrocket to over $3000 for one digital coin after that. Seeing this, more and more experts started to talk about possible spike to 5000 or even 10000 USD.

Bitcoin Cash, aka BCC, is not far behind from its elder brother. Every Bitcoin holder could have acquired it – equally to the Bitcoin sum they own. The similar situation took place after a successful hack attack on the Ethereum fork – the popular cryptocurrency segregated to the primary and Ethereum Classic, very much akin to this situation.

The future of new-born cryptocurrencies is always in the mist and many holders of the digital coins that fell right to their wallets try to get rid of them as soon as possible. In the BCH case, however, the haste didn’t turn out to be justified – in August, the exchange rate overpassed $900 for a time being. At the press time, its price is $607.

What happened?

Let’s try to figure out what actually took place. Terminology here is important, so better start with it: soft-fork is when the rules of block creation are changed, hard-fork is when these rules are replaced. SegWit is soft-fork. One of two possible outcomes can be the blockchain segregation – and this is exactly what happened in our case. While not many participants rejected the SegWit protocol, there was no big divergence of users. The necessity of such measures lies within the technology of blockchain itself – any blocks that are more than 1 MB don’t pass the validation process, that slows the transaction speed down to 3-7 per second. It was more than enough initially, but as Bitcoin was growing more and more popular, this limit became too little. Transactions started to execute in days. The priority of transactions is based upon the miner fee size, so micropayments like paying for a dinner in the restaurant suffered greatly.

SegWit, designed specifically for this problem prevention (and having some additional structural patches) is redistributing data in a typical block, moving the ‘witnesses’ (digital signs and scripts) from the primary parts to a dedicated location that is outside of the blockchain. The old network nodes, however, are still able to read such new blocks. Apart from this, transaction malleability, an old bug that under certain conditions made transactions vulnerable to hack threats, has also been fixed.

As everybody knows, decentralization is one of the primary pros of Bitcoin but when the system is being updated, this pro becomes a con. In simple terms, there was a need for consensus that didn’t seem achievable. Some websites even called this a civil war. Not every participant supported this proposal. Some insisted that the block size should be increased but the rules should remain the same – this was beneficial to big miners. As a result, we have seen the arrival of BCH altcoin that inherited blockchain history of its parent but it’s not able to read Bitcoin’s valid blocks anymore. BCH is thus a full-fledged alternative to the SegWit proposal. The existing blockchain structure remains, but the block size is increased to 8 MB. This initiative is supported by those who think that SegWit is insecure or inefficient, e.g. Chinese big consortiums.

What’s next?

We have yet to see SegWit2x, the implementation of which will increase a Bitcoin block from 1 MB to 2 MB, with all SegWit pros remaining. Around 90% of miners agreed with this initiative. Hard-fork is not expected before the November 2017, before this the developers will elaborate the project details.

Mike Belshe, the project leader, told that during this time one might think that they aren’t doing anything but this isn’t true. The fears and rumors didn’t leave the market, as the cryptocurrency can be called the most volatile financial asset on this planet, but these rumors seem to have passed the hysteria maximum and the atmosphere normalizes. Charles Hayter, the founder of the big CryptoCompare exchange, doubts he can name the price of Bitcoin that will be after activation, giving different historical examples:

“With litecoin we saw a fall after the enaction of SegWit, but with bitcoin cash we saw a price rise on 8MB blocks being mined – its half a dozen of one and half a dozen of the other for bitcoin,” he said.

The Lighting Network protocol became available to use thanks to SegWit as well, and it is going to improve the speed of cryptocurrency micropayments.

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