SegWit: Why we needed it

SegWit, short for Segregated Witness, was introduced to address significant issues in the Bitcoin network. The primary reason for its creation was the problem of transaction malleability, which made transactions vulnerable to tampering. Bitcoin transactions are composed of data that locks and unlocks bitcoins, and a transaction id (txid) is generated to identify each transaction uniquely.

However, the signature within the transaction could be altered without changing the txid, leading to a situation where a malicious actor could modify a transaction, make it appear legitimate, and then add it to the blockchain. This made it difficult to track specific transactions and complicated the operation of layer two protocols like the Lightning Network.

SegWit proposed a solution by moving the signature to a new field called the witness field, which would not affect the transaction id when changes were made. This allowed for the creation of layer two protocols that could operate as intended without the fear of invalidating transactions. Additionally, SegWit introduced a new way to measure block data called block weight, which effectively increased the block size by excluding witness data from the calculation.

This resulted in lighter transaction sizes, leading to lower fees for SegWit transactions. Furthermore, SegWit's script versions feature allowed for future upgrades to the Bitcoin protocol by enabling changes in spending rules without requiring a new address format or disrupting the functionality of older nodes.