Bitcoin transaction confirmation costs have fallen to a mere 20 Satoshis per byte, as SegWit adoption gains momentum. Even though SegWit was activated on Bitcoin mainnet in August 23, 2017, it started gaining prominence only in January. In December, when Bitcoin traded near its peak price of about $20,000, transaction costs hit a high of 1,200 Satoshis per byte.
As more exchanges and wallet providers have started offering support to SegWit, the costs are coming down, which may boost mass adoption of Bitcoin.
SegWit addresses usually begin ‘3’. SegWit addresses now account for nearly 30% of Bitcoin transactions.
What is SegWit?
SegWit is the acrnonym of Segregated Witness. Each of the Bitcoin transaction has a transaction and signature data. SegWit protocol segregates transaction data from signatures (witnesses) data. Hence, the concept, formulated by Dr. Pieter Wuille, gained the name SegWit.
How SegWit works?
The maximum block size in the Bitcoin main protocol is 1MB. This allows only approximately 7 per second to be processed by the Bitcoin network. SegWit, a protocol upgrade increased the block size limit by removing signature data from Bitcoin transactions. Since a portion of data pertaining to a transaction is removed, the overall capacity of the block increases, leading to an increase in the number of transactions processed per second.
Digital signature accounts for nearly 65% of the space in a transaction. By removing the signature data from the input and moving it to a structure at the end of a transaction, the block size is increased from 1MB to a little under 4MB.
Other advantages of SegWit
Apart from aiding an increase in the number of transactions, which brings down confirmation costs, SegWit also fixes the problem where a receiver could intercept and modify the sender’s transaction ID in a bid to get more coins from the sender. Since the digital signature is segregated from the input, a receiver will not be able to change the transaction ID.
Coingate, the crypto currency payment gateway, implemented SegWit on December 23, 2017. By early January, BTC.com, a wallet provider and mining pool, started providing support to SegWit. Further, the BTC.com development team also announced that it has implemented a system, which automatically calculates optimal Bitcoin fees based on time pressure, network peak times, and the size of the transaction. Many users lack technical knowledge and end up spending more fees to get a transaction confirmed.
By early February, Coinbase informed its customers that it will soon offer SegWit (Segregated Witness) facility to its customers. A week before, Coinbase started offering SegWit facility to Bitcoin and Litecoin. The release of Bitcoin Core version 0.16.0, which offers full support for SegWit in the wallet and user interfaces, has resulted in a steep decline in the Bitcoin transaction costs.
Upcoming technological advancements
Lightning transaction facility, which practically removes all restrictions on Bitcoin scalability, is currently being tested. The Lightning network has also widened with 1,000 mainnet channels. Once Lightning transaction facility is made available then we can expect transactions costs to stabilize at the current level, while experiencing a near instantaneous confirmation.