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Segwit – the reduction in bitcoin transaction fees

Segwit, also called Segregated Witness, has begun a massive roll out in the past month that has caused a huge reduction of fees in bitcoin transactions.

Not many people understand what segwit is, why it reduces fees or even that it is segwit reducing the fees.

Let us start by explaining what segregated witness is.

With cryptocurrency, transactions are put into a small block of data. These blocks are basically electronic ledgers. Two specific pieces of that information make up roughly 60% of the total block size. These pieces of information are known as scriptSig and scriptPubKey.

These pieces of information are actually not important to the transaction itself, but rather they contain signatures that are only needed at validation time.

A few years ago, a man by the name of Pieter Wuille who has a Ph.D in computer science came up with a brilliant thought, “What if transaction-producing software could separate, aka segregate, the transaction signatures, aka witness, from the rest of the data contained within the transaction information?”

This concept birthed the idea of segwit.

By implementing this idea, the transaction size of each block could be decreased by almost 60%. This would be the case as each transaction did not need to carry the transaction signature.

Because the block size is decreased, this means less computing power is required to prove a transaction, and thus lower overall fee’s.

When the idea was first introduced many argued that it would only reduce fee’s by minimal amounts and those mining, aka proving the transactions, would still require larger fee’s than most transactions would be worth.

However within the past month, most of the major wallet providers and exchanges have implemented this change, as has bitcoin cores main wallet. The results have been a lot more drastic than merely cutting fee’s in half.

In fact 3 months ago the average transaction was between $20 US Dollars and $30 US Dollars for every single transaction, no matter how big or small the transaction may have been. So spending $3 US Dollars on a cup of coffee was certainly not worth it.

If we take into account at the time bitcoin was worth almost $19,000 US Dollars and now its down to $11,000 US Dollar valuation, that would mean the reduction from $20 US Dollars to $30 US Dollars, would have dropped on its own to somewhere between $10 US Dollars and $15 US Dollars per transaction.

If segwit only cut those fee’s in half we would still be looking at $5 US Dollar to $7 US Dollar transaction fee’s, instead we are seeing average fee’s of under $1 US Dollar.

Bitcoin Core, the active development team that works on bitcoin, had implemented these changes back in August of 2017, however most miners, exchanges, and wallets ignored this. It was not until last month, February of 2018, when bitcoin core implemented this into their own default wallet that the majority of other wallets and exchanges began to make the switch.

Now more than 50% of services and wallets have implemented the new segwit code, and thus transactions are dropping like crazy.

These new changes are absolutely groundbreaking for bitcoin and bitcoin supporters as they solve one of the major arguments altcoins have been trying to replace bitcoin using – high transaction fee’s. As this argument is no longer valid, one can only speculate what this will mean for countless coins whose sole reason for existing is to reduce the no longer high bitcoin transaction fee’s.

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