The formal title "Segregated Witness (Consensus layer)" had Bitcoin Improvement Proposal number BIP141. The declared purpose was to solve the bitcoin transaction malleability. It was also intended to mitigate a blockchain size limitation problem that reduces bitcoin transaction speed. It does this by splitting the transaction into two segments, removing the unlocking signature ("witness" data) from the original portion and appending it as a separate structure at the end. The original section would continue to hold the sender and receiver data, and the new "witness" structure would contain scripts and signatures. The original data segment would be counted normally, but the "witness" segment would, in effect, be counted as a quarter of its real size.
Bitcoin is a cryptocurrency, a form of money using cryptography to keep transactions secure. Each record of a unit of bitcoins is called a "block", and all blocks are tied together sequentially by using a cryptographic hash on the previous block and storing its output in the next. This forms a chain of blocks, or a blockchain.
Each block contains information about who sends and receives a given unit of bitcoin (a transaction), as well as the signature that approves each transaction. Originally, there was no limit to the size of blocks. However, this allowed malicious actors to make up fake "block" data that was very long as a form of denial-of-service attack (DoS attack). These fake blocks would be detected, but doing so would take a very long time, slowing down the whole system.
The solution Satoshi Nakamoto designed was to put a limit on block size, which was 1 MB. This way, attacks using huge blocks would be instantly detected and rejected, without significantly slowing down the network.
The current bitcoin blockchain design is regarded as having two shortcomings.
A new block is added to the chain at random intervals averaging, by design, ten minutes (proof-of-work causes this delay). Together with the limit on block-size, this limits the number of transactions that can be processed in a given time. Some sites work around this problem using "off-chain payments", conducting transactions without waiting for confirmation by the bitcoin network.
Others have proposed changes to bitcoin that would reform the blockchain format in a backward-incompatible way. For example, FlexTrans (Flexible Transactions) would make transactions smaller by changing how they are described to a "tag" system, allowing more transactions per block. This is not compatible with systems that do not upgrade.
This section may be confusing or unclear to readers. In particular, transaction malleability was not introduced by SegWit. (May 2018) (Learn how and when to remove this template message)
Another property of SegWit is "transaction malleability". Even though every transaction is cryptographically signed, the signature doesn't encompass all transaction data. Many people consider this a flaw because a user can potentially change a transaction ID. This could lead to extra bitcoin being sent if a user claims they never received the bitcoin and the sender checks the original transaction ID to verify (which would not exist on the block chain if the ID was changed).
The reasons malleability was introduced are because it enables signatures to be added after the transaction is created (which is necessary for Lightning Network), and because it reduces the transaction size by 65% .
SegWit proposes significant backward compatibility. It hides its increased block size by changing the definition of a block to be measured as one million "units" instead of bytes.[clarification needed] The signature data called the witness would be separated from the Merkle tree record of who is sending or receiving the bitcoins. The witness data is moved to the end, and each byte of it would only count as one quarter of a "unit". The overall effect would be changing the average block size to about 1.8 MB instead of 1.[clarification needed] This means the existing bitcoin protocol doesn't change, allowing it to work without as much upgrading of software.
It also addresses signature malleability, by moving signatures out of the transaction data, making them impossible to change. The transaction ID is no longer malleable. This makes Bitcoin safer to use with Lightning Network, a way to speed up small payments by bundling them and only writing to the blockchain at the beginning and end of their execution, which would be (slightly) risky while the malleability problem still exists.
On 21 July 2017 bitcoin miners locked-in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the Segregated Witness upgrade activated at block 477,120. SegWit alleviates the scaling problem in two ways:
By 8 August another milestone was reached when 100% of the bitcoin mining pools signaled support for SegWit, although SegWit would not be fully activated until 21 August at the earliest, after which miners would begin rejecting blocks that do not support SegWit. Initially, most bitcoin transactions have not been able to use the upgrade. In the first week of October the proportion of bitcoin transactions using SegWit rose from 7% to 10%.
Segregated Witness (BIP141) should not be confused with SegWit2x (SegWit2Mb). In May 2017 Digital Currency Group (not to be confused with the Digital Currency Initiative of the MIT Media Lab) announced it had offered a proposal, referred to as SegWit2x ("the New York Agreement"), activating Segregated Witness at an 80% threshold of the total bitcoin hash rate, signaling at bit 4; and activating a 2 MB block size limit within six months with support in excess of 80% of the total bitcoin hash rate.
As of mid-2017 the SegWit2x proposal had support in excess of 90% of the hashrate, however the SegWit2x proposal has been controversial in that work on the project is limited to an invitation only group of developers. In mid-July 2017 it became apparent that miners supported implementation of the Segwit part of the agreement before the 1 August 2017 UASF, thereby attempting to avoid the risk of a hard fork for the bitcoin network. On November 8, 2017, the developers of SegWit2x announced that the hard fork planned for around November 16, 2017 was canceled due to a lack of consensus.
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