Introduction to SegWit – Part 3. Fees on the Bitcoin Network. Benefits of SegWit.

The network adds coins to circulation by giving them as rewards to miners. As of the beginning of 2018, the network had over 16.5 million of bitcoins in circulation out of 21 million possible coins.

The bitcoin network aims to create a block every 10 minutes, so that it can achieve the goal of adding 21 million coins by 2140. It halves the rewards that it gives to miners for mining blocks every 210,000 blocks. The original reward for mining each block in the first 210,000 blocks of the blockchain was 50 bitcoins. Then, it went down to 25 bitcoins. As of the beginning of 2018, the reward for mining a block on the bitcoin network was 12.5 bitcoins. It is supposed to go down to 6.25 bitcoins approximately in June of 2020. You can see the number of total bitcoins in circulation as you are reading this article, the percentage of total bitcoins mined and the estimated next reward-drop time by visiting www.BitcoinBlockHalf.com

 

Fees on the bitcoin network

Fees exist on the Bitcoin network as a tool for Bitcoin users to incentivize miners. Fees and not mandatory and are regulated by the laws of supply and demand.

Currently, miners are getting rewards for creating new blocks of the Bitcoin blockchain from the network. This means that even if a miner compiles a block of free transactions, meaning that transaction participants choose not to include any fees and the miner chooses to include the transactions into the blockchain blocks, and comes up with a winning hash, the miner will still get the block mining reward. The vision of Nakamoto was that by the time the network becomes popular and all the bitcoins are in circulation, the miners would be getting compensation from the fees for their work of compiling and processing transactions on the network. However, because the network became so popular in the recent years, the number of transactions on the network has skyrocketed. On January 1, 2013, the network added to the blockchain a little over 10.5 million transactions. A year later, on January 1, 2014, this number was a little over 30 million transactions. Four years after that, on January 1, 2018, the users of the Bitcoin network have completed 288 million transactions.

With the number of transactions being this high, miners, who can freely choose which transactions to include in the blocks that they create, have become very picky about the transactions they include. Obviously, miners prefer to process transactions that include fees because it is the miners who keep all the fees from the transactions they include in their block in addition to the block mining reward. This is the reason why the fees on the network have skyrocketed and made the network unusable for small transactions. Even though the network is still gaining a lot of new users, after performing a few transactions on the network the users quickly realize that the network has the fee issue, which prevents using it to send small amounts of money.

 

How Segregated Witness (SegWit) Protocol Works

SegWit protocol created a new structure on top of the Bitcoin network. This structure checks out the header of the transaction and makes sure that the header is valid without dealing with the actual transaction. Fundamentally, SegWit removes the malleability risk from the main blockchain and checks it before a transaction becomes a part of the blockchain and has all its information added to the blockchain, making the information irreversible. The information about the signatures processed by SegWit does not count towards the 1 megabyte restriction of the blockchain block size of Bitcoin network. Instead, the protocol has a new parameter, called weight. SegWit allows blocks with a weight of up to 4 million weight units or WUs. A byte in the original blocks of the main Bitcoin blockchain is 1 WU in the new witness structure, which means that SegWit has technically increased the size of the blocks without altering the original software of the network.

 

Benefits of SegWit

SegWit makes it possible to track bitcoin spending in an easy way, which is looking transactions up using their transaction identifiers. While doing so is possible on the Bitcoin network without SegWit, is doesn’t always work because of malleability issues that SegWit removes. SegWit also makes Lightning Network easier to implement and use.