The percentage of transactions which utilize the SegWit (Segregated Witness) protocol has been rapidly increasing on the Bitcoin network and now sits at 38%, amid news that the Xapo Bitcoin wallet & vault has activated SegWit.

Xapo stores over 10 billion USD of Bitcoin, which is larger than the holdings of most banks in the United States. Xapo dominates the institutional cryptocurrency market and is the go-to provider for Bitcoin custodial and security services. The activation of SegWit by Xapo is directly responsible for the rapid rise in the percentage of SegWit transactions on the Bitcoin network this month; there has been a spike from 29% to 38% in just the last 2 weeks.

Bitcoin implemented SegWit via a soft fork on 24 August 2017. A soft fork is similar to a hard fork in the sense that it changes the set of rules used to create blocks, but it is different because it is backward-compatible, older versions of the Bitcoin software are able to recognize blocks produced by the new software. This avoids the problem of a blockchain split that often occurs during hard forks if a significant number of users don’t upgrade their software, which can result in losses of cryptocurrency, and therefore soft forks are much safer for the network’s health.

SegWit provides a solution for the Bitcoin block size problem. It changes the definition of a block size from 1 million bytes to 1 million units. It separates signature data, i.e. witness data, from the Merkle Tree and puts it after the end of the transaction data. The witness data only counts as 1/4 of a unit, effectively increasing the block size to 1.8 MB from 1 MB. This allows more transactions to fit into a block and reduces transaction fees, making Bitcoin more scalable and improving its usefulness as a currency.

Another important thing that SegWit accomplishes is it fixes the transaction malleability problem. In the old Bitcoin protocol a receiver could change the transaction ID and scam the sender into sending more Bitcoin since the original transaction ID would no longer appear on the blockchain. SegWit moves signatures out of the transaction ID, making it impossible to change the transaction ID. This removal of transaction malleability is a crucial step for making the Bitcoin Lightning Network safe.

Due to the improvements that SegWit provides over the old Bitcoin protocol, its increasing use is a positive step towards Bitcoin becoming a widely used global currency.

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Image Source: Albert dro, CC BY-SA 4.0

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