SegWit: User moves 40,000 BTC for $1 fee

According to information on Reddit, Twitter and bitcointalk, a well-known - and former - user of bitcointalk.org (Loaded), traded 40,000 bitcoins (that's forty thousand), paying just 0.0001 BTC of fee ($ 1.08, in the quotation of when the transaction was made).

From the data provided, the transaction took 61 minutes to be included in the blockchain. At the time it was made, bitcoin's Mempool had approximately 94,701,634 bytes of transactions to process - something around 72,000 transactions (pictured below).

This information is very important because it shows, in practice, how bitcoin transactions can be scaled.

SegWit is the abbreviation for Segregated Witnesses and is a proposal presented by Bitcoin Core team. It comes in the form of a soft fork, an upgrade that may work even if some users do not update their software (without resulting in a split of the blockchain). It was released in version 0.13.1 of Bitcoin Core.

There are three key elements to the Bitcoin transactions. Who sends, receives, and signatures (called witnesses) and these take up a large part of the size of the transaction. Contrary to popular belief, segwit does not separate signatures from transactions.

Instead, SegWit uses another way of counting the size of the blocks. Instead of using a 1MB limit for blocks, use a larger value. This limit will be 4 Million units. In this system, each byte of signatures (witnesses) is counted as one unit and each remaining byte is counted with four units. Essentially, SegWit introduces a new transaction format.

This means that the size of the blocks is increased without the need for a hard-fork. This is because after SegWit, each byte of signatures is counted as 0.25 bytes, that is, if the transactions only had signature data, the maximum size would be approximately 4MB. This does not mean that the information gets smaller, only that it is counted so that the 1MB limit is increased. This change only affects subscriptions and as such, each out-of-subscribe byte is still counted as 1 byte (or 4 units). As such, the blocks have a capacity of about 2MB.

The most obvious advantage of SegWit is the capacity increase that is introduced as a different transaction format. However, there are more advantages that can be seen here.

However, fixing the problems of transaction malleability is the most important. Transaction malleability exists because signatures that protect transactions from being modified, can not protect themselves. This means that how the transaction id (txid) is calculated allows anyone to make changes.

SegWit arranges this by removing the signatures of the transaction id, which makes it impossible for someone to modulate the signature data. With SegWit, the txid is then calculated from data that can not be changed.

The smoothness of the transaction settles the way for payment channels like the Lightning Network (LN). This is one of the reasons why miners and pools do not like SegWit. Transactions that occur on these payment channels are not part of the Bitcoin network, which means that charges do not go to them.

Tags: #bitcoin #segwit #lightingnetwork #cryptocurrency #money
Author: José Domingues da Fonseca Neto