1. The Scalability Problem Before SegWit
2. Addressing Scalability: The Bitcoin SegWit Upgrade
3. Benefits and Challenges of SegWit

Since its launch in 2009, Bitcoin has showcased blockchain technology to the world, providing a blueprint for a new kind of currency — decentralized, digital, and independent of traditional banking systems. It is the first cryptocurrency and a recognized medium of exchange, with a market capitalization in the hundreds of billions. However, as Bitcoin's popularity grew, it faced scalability issues that demanded solutions like Segregated Witness or SegWit.

The Scalability Problem Before SegWit

Bitcoin's creator, Satoshi Nakamoto, equipped Bitcoin with a 1 megabyte (MB) block size limit as a cautious measure against potential spam attacks. Initially, this limit was sufficient. However, as Bitcoin moved into the mainstream, the 1 MB block size limit became a problem. The constraint on transaction numbers within each block led to longer processing times and higher transaction fees, highlighting systemic vulnerabilities. In 2017, transaction fees peaked at nearly $55, making Bitcoin impractical for small transactions.

Addressing Scalability: The Bitcoin SegWit Upgrade

To address scalability issues, the Bitcoin SegWit upgrade was proposed and implemented. SegWit, short for Segregated Witness, changes the storage of data by separating the digital signature (witness data) from the main transaction data. This allowed for more transactions to fit into each block without increasing its size. Additionally, SegWit fixed the issue of mutable transaction IDs, laying the groundwork for second-layer solutions like the Lightning Network.

Benefits and Challenges of SegWit

SegWit has had a significant impact on the Bitcoin network. As of mid-2023, over 70% of all transactions used SegWit. Benefits include increased block capacity, reduced transaction fees, and the fix for transaction ID malleability. However, SegWit also faced criticism and caused community division, ultimately leading to the creation of Bitcoin Cash. Critics argued that the core issue was the need for increased block size, not just data storage changes.

The SegWit upgrade has been a crucial step in improving Bitcoin scalability. It has provided immediate benefits in terms of increased capacity and reduced fees, while setting the stage for future enhancements like Schnorr signatures and Taproot. SegWit has proven to be significant for Bitcoin's adaptability and growth.