History was made last night when Segregated Witness (or SegWit), the most anticipated Bitcoin protocol upgrade of all time was activated – not on the Bitcoin network, but rather the smaller Litecoin network.
But what does it all mean, exactly?
Some see SegWit as a capacity upgrade, increasing the number of transactions per block by around 70% without increasing the block size from 1MB. The bickering over blocks vs SegWit has been preventing Bitcoin from deploying the upgrade, as miners see a more efficient network as eating into their revenue (not to mention the recent ASIC Boost controversy).
But SegWit is more than that. SegWit is a bug fix. It fixes the infamous transaction malleability bug that allows malicious actors to change transaction IDs at will (but not source or destinations), and it allows for versioning so that smaller upgrades can be made without having to gain full consensus from every party involved (which is what is keeping Bitcoin from upgrading).
So … now that SegWit is live, what can we expect from Litecoin?
SegWit = 70% more capacity
SegWit, as its full name implies, means that the witness part of a transaction – the signatures – are segregated and not included as part of the blockchain. This has the immediate effect of increasing the network capacity by around 70%.
Litening: Instant, cheap, off-chain transactions free from capacity limits
Lightning (or as many now prefer to call it, Litening) works on the principle of an off-chain proof-of-stake payment network exchanging fully-valid but not redeemed Bitcoin (or in this case Litecoin) transactions that only get settled on the network when the payment channel is closed days or even months later. While the payment channel is open, money can be transferred instantaneously to and from the wallet without the need to wait for it to be confirmed in a block. If the lightning nodes suddenly disappear, they cannot steal your money and the current balance can be settled by broadcasting the transaction onto the Litecoin blockchain. It turns the blockchain into a net settlement layer, taking traffic off the blockchain (not that Litecoin has much traffic, which is why it is hated by miners). Ultimately for the end user, it means instantaneous transactions and much, much, much lower transaction fees.
Lightning could not happen without SegWit because of the transaction malleability bug. Anyone changing the transaction ID would make the channel unusable and open to fraud.
Most importantly, because only net settlements are broadcast to the blockchain, Lightning/Litening scales Litecoin by the number of users regardless of the number of transactions they make, rather than the big block vision of just doubling the number of transactions.
Schnorr signatures: increased privacy and even more capacity
Another feature that SegWit brings is the possibility of using Schnorr signatures to replace the existing elliptic curve key. Schnorr signatures are different in that they can be mathematically combined. Anyone that’s tried implementing multi signature wallets on Bitcoin (those addresses that begin with 3 instead of 1) knows that while multisig can work, it is much more expensive, as all the signatures need to be included in the transaction. With Schnorr, the signatures can be mathematically combined so that a multisig 6-of-12 wallet would need just one signature in the transaction that has been signed by six of the 12 key holders instead of six different signatures. This alone would make it smaller than elliptic curve by around 75% (thus increasing network capacity again), but with SegWit, Schnorr now goes entirely off-blockchain.
Schnorr signatures also improve privacy. In Bitcoin multisig, a 3-of-5 multisig wallet that is spent would immediately show which three of the five signatures were used to unlock it and spend it. With Schnorr, it can be mathematically proven that three of five signers signed it, but not which three.
Strictly speaking, Schnorr could have been implemented without SegWit, but this would have required a hard fork. SegWit brings with it the possibility of different script versions running together on the same blockchain, safely ignored by older nodes. Which brings us to the next big thing.
MAST: Smart contracts
Another soft-fork version being designed and tested for Bitcoin – and now likely to be implemented on Litecoin – is MAST (Merkelized Abstract Syntax Trees). In a nutshell, MAST is an extension of the P2SH (Pay to Script Hash) type of transaction (of which multisig, as mentioned earlier, is the most used one). MAST does not quite bring Ethereum levels of computation to the party, but it does allow for much smarter and more complicated smart transactions than was previously possible on Bitcoin and Litecoin.
Confidential transactions: yet even more privacy
Bitcoin and other first generation cryptocurrencies have been criticized as being at best pseudonymous rather than anonymous. Confidential Transactions is another script version proposal that would make it fully anonymous.
All up, a new dawn has risen in the cryptocurrency space. All the upgrades in the pipeline for Bitcoin that have been held back by the bickering between the miners and developers are now being implemented on Litecoin. Some are treating Litecoin as a real-world test network for the Bitcoin technologies at scale, with the assurance that if something does go drastically wrong, the economic fallout will be much less than if it happened with Bitcoin. Others believe that this is the start of something entirely new that could even surpass Bitcoin in terms of features and acceptance if Bitcoin continues to resist SegWit.
It will take a while for wallet makers, users and vendors to catch up with SegWit. Perhaps the real question is how many developers will jump ship to Litecoin before Bitcoin gets its act together and stops arguing.