After more than two years of debate, segregated witnesses (segwit) has finally activated on the Bitcoin Core chain at around 3AM London time on the 24th of August 2017.
The upgrade is meant to increase capacity to around 1.7MB from the previous 1MB, but hours after its activation, it has increased it by none at the time of writing.
The reason might be because miners may need to increase their soft-limit from the current 1MB to 2MB or perhaps even 4MB. At the same time, the entire ecosystem needs to modify their code so that it works with segwit.
That includes exchanges, like Coinbase and Kraken, which have to upgrade their code beyond just upgrading a node. A task that may take some time.
As such, currently, it’s as if segwit hasn’t activated at all as far as capacity is concerned with everyone waiting for the first bigger than 1MB block. Something which would depend on organic use of segwit.
This compares to the simple base blocksize increase that Bitcoin Cash used. Their very first block was 4MB, clearing the entire backlog. With the network creating an 8MB block too, processing 40,000 transactions. Thus instantly increasing capacity.
The segwit upgrade, instead, has only increased fees at this stage. Pieter Wuille, a Blockstream employee and Bitcoin Core developer who coded much of segwit, paid an $8 fee to try and claim the title of having made the first segwit transaction.
He only managed to get in third. Showing that even the so-called wizards have no clue about how this “fee market” works, let alone the mere mortals who have to pay a fee of $4.25 for the simplest 226 bytes transaction.
Some transactions are double that size, which means double the fee at $8. Organic segwit transactions are usually bigger, so will anything actually change at all?
Segwit’s critics have long argued it does not actually increase blockchain capacity in any meaningful sense or in a timely fashion because of the combined factors of bigger transaction sizes and considerable ecosystem wide effort to upgrade the entire infrastructure.
The process will likely be very gradual and slow, over many months. Which might mean that as far as the end user is concerned it would be as if there was no segwit upgrade at all.
That said, we may soon get a bigger than 1MB block on the Bitcoin Core chain, but it may contain less transactions or the same amount of transactions with any increase probably not even noticeable.
That’s because segwit is not really a capacity upgrade. It doesn’t have much to do with the blocksize. It’s aim is primarily to segregate witnessing signatures so as to make malleability of transactions more difficult to allow for second layer protocols like the Lightning Network.
That protocol remains in heavy development. Once it comes out, its effects too might be not very noticeable for end users as the entire ecosystem, or a great part of it, needs to adopt it. Which will necessarily take time.
That’s why big blockers argued for an increase of capacity to provide that needed time. While public blockchains like ethereum provide their users the option to transact on the blockchain or on second layer LN like protocol such as Raiden or Plasma.
However, Bitcoin Core developers, and in particular employees of Blockstream Corp, think such time is needed for blockchain fees to increase so that once LN is ready everyone, except for LN hubs, stop using the blockchain.
Some consider that to be a complete transformation of the peer-to-peer network, but the market now has plenty of choices, so they are very free to decide how to transact.