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Binance, Kraken, and Nanex have joined Bitfinex and Coinbase in supporting Segregated Witness (SegWit) technology, and Bitcoin transaction fees have dropped to 75% in some cases. It appears that Bitcoin traders are finally witnessing the lower transaction fees and improved scalability that SegWit had promised.

Reduce in Bitcoin transaction fees on Binance, Kraken and Nanex

If you are a Bitcoin trader, you likely know why, in spite of its promise of freedom from government and central bank intervention, Bitcoin hasn’t yet replaced your credit card for day-to-day transactions. Bitcoin has been affected by the following issues:

  1. Scalability: Only 7 Bitcoin transactions could be executed per second, as recently as January 2018. Also, as of February 19th 2018, average time required to confirm a Bitcoin transaction was 116.2 minutes! Compare with over 1,000 transactions per second with credit card, with near-instantaneous transaction confirmation, Bitcoin certainly didn’t match up to your credit card.
  2. High transaction fees: Nearly US $ 25 transaction fees as of January 2018 for Bitcoin simply didn’t compare well with very low-cost credit card transactions.

The above issues are closely related to the block-size limitations in the blockchain underpinning Bitcoin. A Bitcoin block has maximum limit of 1 Megabyte (MB), and transactions included in 1 block is processed every 10 minutes. Due to high degree of interest around Bitcoin, executing Bitcoin transactions is intensely competitive. Basically, everyone wants their transaction to be included in the next block, however, block-size limits the number of transactions. Bitcoin traders pay fees to the miners, to get their transactions processed faster, i.e. to get them included in the first available block. With time, and increasing interest in Bitcoin, competition to get transactions included in the 1st block available has increased, and so has the fees paid to the miners.
Additionally, Bitcoin has also been plagued with malleability issues. Any encryption is about converting a plain text into cipher text, using a unique secret key. When the ciphertext is converted back to plain text using the same secret key, that process is called decryption. If a cyber attacker can convert the ciphertext into another, while the data is in-transit, then the new ciphertext can be converted back to a different, although related plain text. Using such a loophole a cyber attacker can change the payment address and payment amount in a payment transaction, for example. If an encryption technology allows that, then it is malleable. Bitcoin’s encryption algorithm is malleable.

Segregated Witness (SegWit), formally known as “Segregated Witness (Consensus layer)”, was conceived as the Bitcoin Improvement Proposal (BIP) 141, in 2015. After much deliberations, including exploration of alternate technology, it has been released on August 24th 2017. SegWit solves the above issues using the following means:

  1. SegWit defines a new structure called Witness, which is committed to the block separately. This structure won’t house the data required to determine the effect of transaction, it only data needed to validate the transaction authenticity.
  2. Signature and redeem scripts are part of this structure and these no longer count towards the 1 MB block-size limit.
  3. A new parameter called Weight is introduced, with the rule that a block can have maximum of 4 million Weight Units (WUs). 1 byte of original block structure is equivalent to 4 WUs, however, 1 byte of the witness structure is equivalent to 1 WU only. The effective block-size is now over 1 MB, and more transactions can fit in a block, solving the scalability issue, and thus also reducing the transaction fees.
  4. Block-size is effectively increased using a new parameter, without having to change the old rule of 1 MB block-size, and this eliminates the need of a hard fork. The soft fork required to implement SegWit is fully backward compatible.
  5. Transaction data won’t have signature anymore, since it’s moved to a new structure, hence a cyber attacker can’t change the signature anymore even if he was able to access transaction data. This resolves the malleability issue.

After the August 24th 2017 release, adoption of SegWit had been slow, reaching 10-14% of all transactions around early 2018, with many soft and hard wallets introducing SegWit support. However, in February end, the prominent exchange Coinbase had announced SegWit support through their exchange GDAX. Another prominent exchange Bitfinex also announced SegWit support around that time. These two exchanges accounted to 10% of global Bitcoin trade, and traders started to see reduced transaction fees and improved scalability from end of February. Now, Hong Kong-based Binance, with trading volume of US $ 1.9 billion, and San Francisco, California, USA-based Kraken, which has trading volume of US $ 280 million, have announced SegWit support. They have reduced Bitcoin transaction fees by 50%. USA-based Nanex, another crypto exchange, has also announced SegWit support, with an impressive 75% reduction in transaction fees. SegWit Adoption now stands at 30% as of early March 2018. Lower transaction fees and improved scalability is expected to increase Bitcoin trading, with consequent increase in price.