Bitcoin SegWit Tutorial

SegWit (short for Segregated Witness) is a major Bitcoin protocol upgrade activated in August 2017 that changes how transactions are structured to fix long-standing problems and enable future improvements.

At a high level:

SegWit separates (“segregates”) the signature data (witness) from the rest of the transaction.

But that simple sentence hides several very important consequences.

1. The problem SegWit was designed to solve

1.1 Transaction malleability (the big one)

Before SegWit, a Bitcoin transaction ID (txid) was:

txid = SHA256(SHA256(full_transaction_bytes))

The signature data (scriptSig) was part of those bytes.

🔴 Problem: Signatures can be encoded in more than one valid way, so someone could modify a transaction without changing what it does, yet produce a different txid.

This caused:

• Broken payment tracking
• Difficulty building multi-transaction protocols
• Impossibility of safe payment channels → Lightning Network could not exist

1.2 Block size limit pressure

• Pre-SegWit blocks were limited to 1 MB
• Signatures make up ~60–70% of a typical transaction

Bitcoin needed:

• More throughput
• Without a risky hard fork

2. What SegWit actually changes (core idea)

SegWit introduces a new transaction format:

Old (pre-SegWit)

[input]
  └─ scriptSig (signatures here)
[output]

New (SegWit)

[input]
  └─ scriptSig (mostly empty)
[witness]
  └─ signatures & scripts
[output]

➡️ Signatures move into a new structure called the witness.

3. Two transaction IDs now exist

With SegWit, a transaction has two identifiers:

3.1 txid (legacy ID)

• Hash of the transaction without witness data
• Immutable once created
• Solves transaction malleability

3.2 wtxid (witness transaction ID)

• Hash of the transaction including witness
• Used internally by nodes

⚠️ Only txid is used to reference UTXOs.

4. Block weight: how SegWit increases capacity

Instead of a hard 1 MB limit, SegWit introduces block weight:

block weight = (non-witness bytes × 4) + witness bytes
maximum = 4,000,000 weight units

This means:

• Non-witness data is “expensive”
• Witness data is “cheap”

Practical result

• Blocks can be ~1.7–2.3 MB in practice
• No hard fork required
• Old nodes still see ≤1 MB blocks

✔️ Backward compatibility preserved

5. New script types enabled by SegWit

SegWit introduces witness programs:

5.1 P2WPKH (Pay to Witness PubKey Hash)

• Native SegWit
• Address starts with bc1q...
• Replaces P2PKH

ScriptPubKey

0 <20-byte pubkey hash>

5.2 P2WSH (Pay to Witness Script Hash)

• Replaces P2SH for complex scripts

ScriptPubKey

0 <32-byte script hash>

5.3 P2SH-wrapped SegWit (transition format)

• Address starts with 3...
• Allows old wallets to pay SegWit wallets

6. Why SegWit fees are lower

Because:

• Fees are paid per virtual byte (vB)
• Witness data counts as ¼ the cost

Example:

• Legacy P2PKH input: ~148 vB
• SegWit P2WPKH input: ~68 vB

➡️ ~55–60% fee reduction per input

7. SegWit enables Lightning Network

Lightning requires:

• Transaction IDs that cannot change
• Pre-signed transactions chained together

Before SegWit: ❌ txid malleability made this impossible

After SegWit: ✔️ Stable txids ✔️ Off-chain payment channels ✔️ Instant, cheap payments

SegWit is the foundation of Lightning.

8. SegWit versioning: future-proof design

SegWit introduces versioned witness programs:

OP_n <program>

• Version 0 → SegWit v0 (P2WPKH, P2WSH)
• Version 1 → Taproot (BIP341)
• Versions 2–16 → reserved for future upgrades

This allows soft-fork upgrades forever.

9. SegWit vs Taproot (quick comparison)

Taproot is built on top of SegWit, not a replacement.

10. Common misconceptions

❌ “SegWit increases block size” ➡️ No. It changes weight accounting.

❌ “SegWit is optional” ➡️ For users, yes. For Bitcoin’s future, it’s essential.

❌ “SegWit breaks old nodes” ➡️ No. Old nodes still function correctly.

11. Why SegWit matters philosophically

SegWit shows Bitcoin’s design principles:

• Backward compatibility
• Minimal trust
• Layered scaling
• Long-term upgradeability

Instead of rushing to bigger blocks, Bitcoin chose sound engineering.

12. One-sentence summary

SegWit fixes transaction malleability, lowers fees, increases capacity, and makes Lightning and Taproot possible—without breaking Bitcoin.