What is a SegWit Wallet?

If you’re searching for a Bitcoin wallet, you’ve likely found there are several types available. One is type of wallet solution for cryptocurrency, SegWit, is out there and understanding the difference between this wallet type and the others is key before you sign up.

Understanding how Bitcoin Actually Works

To understand cryptocurrency, SegWit and its relationship to Bitcoin, you have to know how Bitcoin works. Bitcoin is a chain, and every link that you have in that chain is one block. Inside each block is data. The data includes the sender’s private and public keys, the recipient’s public key, the amount of Bitcoin being sent, and the sender’s digital signature. The digital signature is usually 50 – 60% of any transaction’s size, and these days, that’s a lot of valuable space.

As you likely already know, the Bitcoin network works when transaction requests from everyone on the network are stacked into blocks. Each block (when completed) is sealed and made public. The process itself, though, takes quite a bit of time and uses a massive amount of resources. Because of this, the more transactions that can be processed at any given time, the better off the entire network is. Currently, the network can process 7 transactions per second, but given the number of Bitcoin users today, that’s not a massive number. Each Bitcoin block is designed to weigh 1 MB, which is an average of 1,609 transactions. Too many requests tends to equal increased fees, pushing some customers to cancel their transactions. Those transaction fees can be incredibly expensive. At the height of Bitcoin’s popularity in 2017, the fees could be as high as $50 per transaction if you wanted to be validated within a half-hour. Because of these fees, in 2017, Bitcoin created a new kind of wallet for cryptocurrency–SegWit wallets – which solved some of that problem. This change, called a soft fork, meant Bitcoin could increase its ability to process transactions. A hard fork would have forced all the nodes to upgrade and made all of the previous transactions invalid. In this change, though, a soft fork meant that the chain could stay as one and adoption by all wasn’t necessary.

So, What Is a SegWit Wallet?

SegWit stands for Segregated Witness. The idea, which was created by Peter Wuille, one of Bitcoin’s most dedicated developers, was that because the space in each block was so valuable, only transaction data should be involved, not the signatures that accompanied legacy transactions. Those signatures would be there, but they would be separate bits of data that didn’t fit inside the block.

Many believed a SegWit Bitcoin address was better than Legacy versions (the original wallet type) because there is less data per block, thus more transactions could be inside, thus the blockchain was capable of processing additional transfers. The other bonus? Lower fees, so funds could be sent for less from place to place. What’s more, though, is that SegWit transactions remain backward compatible, so funds could be sent to both old and new wallets. It’s quite popular, too. Last year, nearly 50% of Bitcoin payments came from SegWit Bitcoin address, and more users are adopting it all of the time.

As popular as they care, cryptocurrency SegWit transactions so have some downsides. SegWit stores some data off the original chain, and some purists believe that doing that means admitting the blockchain can’t function on its own. Because many believed that SegWit transactions were a Bitcoin weakness, some chose not to implement it and fork it into a new blockchain – Bitcoin Cash. It’s essentially Bitcoin before SegWit transactions happened, and the idea was to just increase the overall block size, yet keep all of the data on the blockchain itself. Today, there are many more ideas that play off of both sides of the argument, but the simple reality is that SegWit is one of the largest developer groups in Bitcoin.

Creating a SegWit Wallet

You’ll know if you have a SegWit wallet over a Bitcoin legacy wallet (the original wallet type) because the number your wallet begins with signifies its type. If you have a 1 in front of everything, you have a Legacy wallet. If you have a 3 in front of everything, you have a SegWit Bitcoin address. If instead you have a bc1, it’s the latest version of a SegWit Bitcoin address, which helps to further reduce the load on the blockchain.

If you want to make SegWit wallet, it’s not that complicated, but it is different from making a legacy wallet. You’ll need to work with a company that offers a SegWit wallet. You’ll choose from a number of different types (hardware, software, and mobile app), just like you might with a Bitcoin legacy wallet, and you’ll have to do a bit of research to see if they support SegWit.

The Future of SegWit

SegWit was just the beginning. It has become the foundation for the Lightning Network. Because it eliminated transaction malleability – a problem that Bitcoin was facing where transactions could be changed before verification – SegWit has the potential to create secure payment channels that could help Bitcoin scale up to accommodate a increasingly large user base, allowing it to process millions of transactions per second. Native Segwit – which you may know as bech32 – has only furthered this revolution. It offers even faster transaction speeds and lower fees. It also means better error detection processes and has implemented addresses that are all lowercase, which may mean you get much better readability. While bech32 isn’t supported by every major platform yet, it is fully compatible with both Legacy and other SegWit transactions, and there are a number of converters available if you need a different type of address to send money. Moreover, many wallets help to make those address converters possible, so as you shop for the right solution to meet your needs, you may want to consider one with a built-in converter.