What is SegWit (Segregated Witness)

SegWit (Segregated Witness) is a protocol upgrade to Bitcoin that was activated in August 2017 the most significant change to Bitcoin's transaction format since its launch. SegWit addressed Bitcoin's scalability limitations, fixed a critical security vulnerability called transaction malleability, and laid the technical groundwork for the Lightning Network.

THE PROBLEM SEGWIT SOLVED

Bitcoin's original transaction format embedded witness data (digital signatures) within the transaction data counted toward the 1MB block size limit.

This created two problems: Efficiency: Signature data represents 60-65% of most Bitcoin transactions but provided no additional information that mining nodes needed for UTXO tracking. The block weight limit was effectively being consumed by data that could be handled differently.
Transaction Malleability: The original transaction format allowed third parties to slightly modify the transaction's signature data (without invalidating the signature) before confirmation changing the transaction's TXID (hash identifier). This malleability prevented reliable transaction chaining and was a prerequisite obstacle to the Lightning Network.

HOW SEGWIT WORKS

SegWit restructures transactions to separate ("segregate") witness data (signatures) from the transaction data counted in the base block weight. Witness data is stored in a separate data structure and counted at a discounted weight (1/4 of normal transaction weight) rather than full weight. Effect a SegWit block can contain significantly more transaction data than a 1MB legacy block effectively equivalent to 1.7-2.5MB in transaction capacity.

THE TRANSACTION MALLEABILITY FIX

By moving signature data outside the transaction data that determines the TXID, SegWit made it impossible to alter the transaction ID without invalidating the signature. This fix was a prerequisite for the Lightning Network which requires reliable transaction IDs for payment channel commitment transactions.

BECH32 ADDRESSES

SegWit introduced native SegWit addresses in Bech32 format starting with "bc1" (for example, bc1qar0srrr7xfkvy5l643lydnw9re59gtzzwf5mdq). These addresses are lower fee than legacy P2PKH (starting with 1) or P2SH-SegWit (starting with 3) addresses. Most wallets now generate native SegWit addresses by default.

Terms in addition to the SegWit (Segregated Witness)

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.