Segregated Witness, or SegWit, is a 2017 Bitcoin protocol upgrade (BIP-141) that separated transaction signature data from the transaction ID calculation, fixing a long-standing malleability bug while also reducing effective transaction fees, and it paved the way for exchanges to batch withdrawals and cut costs further.
What SegWit actually fixed
Before SegWit activated in August 2017 after considerable industry debate, Bitcoin had a known issue called transaction malleability, where a malicious actor could subtly alter a transaction's hash before it confirmed, without changing its actual effect. This complicated the development of Layer-2 systems built on top of Bitcoin. SegWit resolved this by moving the witness, essentially the signature data, outside of the calculation used to determine the transaction ID, closing that loophole for good.
How batching multiplies the savings
The fee discount from SegWit alone was significant, but exchanges found an additional way to save by combining it with batching. During the congestion of late 2017, exchanges processing customer withdrawals as individual transactions created enormous mempool backlogs and drove fees up for everyone on the network. Combining 100 customer withdrawals into a single transaction with 100 outputs instead of 100 separate transactions cuts total block space usage by up to 80%, which keeps fees more manageable across the whole network during busy periods.
Choosing an address format today
Bitcoin wallets today generally support three address formats with meaningfully different cost profiles. Legacy addresses, which start with the number 1, are the least efficient and are best avoided for new transactions. Nested SegWit addresses, starting with 3, offer backward compatibility with older wallet software and a partial fee discount. Native SegWit addresses using the Bech32 format, starting with bc1q, are now the industry standard, offering the lowest fees and the best built-in error detection of the three formats.
- Legacy addresses starting with 1 are inefficient and best avoided for modern Bitcoin transactions.
- Nested SegWit addresses starting with 3 remain compatible with older wallets and provide a partial fee discount.
- Native SegWit Bech32 addresses starting with bc1q offer the lowest transaction fees and the best error detection.