Bitcoin Magazine

Understanding the Witness Discount

The term witness discount signifies the decrease in data “weight” assigned to the witness segment of a Bitcoin transaction—specifically the area that stores the signatures that verify ownership. This concept was introduced during the 2017 segregated witness (SegWit) update, which effectively reduced fees for SegWit transactions by lowering the count of the witness data when assessing the overall size of a transaction.

In layman’s terms, witness data is given a 75% reduction, indicating that it is considered only one-quarter of its actual size when calculating its space within a Bitcoin block. This adjustment enables the inclusion of a greater number of transactions in each block and helps minimize costs for users utilizing SegWit-compatible wallets.

So, why does the Witness Discount come into play? What purpose does it serve in Bitcoin transactions? The underlying reason is linked to the persistent scalability issues that Bitcoin has faced, along with the necessity to enhance transaction capacity without resorting to a risky hard fork. This article delves into the rationale behind the witness discount, explaining its function and its ongoing significance in today’s ecosystem.

Key Highlights

What is the Witness Discount?: A reduction applied to the size of the witness segment (or signature part) of a Bitcoin transaction, which lessens transaction fees.
Integration with SegWit: The witness discount is a component of the segregated witness (SegWit) upgrade, designed to resolve the long-standing issue of transaction malleability while effectively expanding Bitcoin’s block capacity.
Enhanced Scalability: It contributes to the efficiency of Bitcoin transactions, increasing the number of transactions that can fit into each block.

Reason for the Witness Discount

The witness discount was initiated with SegWit, a significant enhancement to the Bitcoin protocol that divided the transaction information into two distinct segments: the primary transaction data and the witness data (primarily digital signatures). Essentially, witness data received a “discount” concerning its contribution to the total block size.

Before SegWit was introduced, the maximum block size for Bitcoin was limited to 1MB. SegWit facilitated an effective increase in block size by applying a reduced “weight” to the witness data, which allowed for a greater number of transactions within the confines of the existing 1MB limit for non-SegWit nodes.

The witness discount achieves a vital objective: it allows more transactions to be included in a block while ensuring compatibility with legacy nodes that have not yet adopted the SegWit upgrade.

Functionality of the Witness Discount

When a Bitcoin transaction is initiated, the fundamental aspects, such as the amount being transferred and the involved addresses, are documented. Additionally, there is a component known as the “witness,” storing the signatures that authenticate the ownership of the transferred bitcoin.

Before SegWit: Prior to SegWit’s implementation, every element of a transaction was treated equally regarding how much block space it consumed.
After SegWit: With the advent of SegWit, the witness data (signatures) was stored separately from the primary transaction data. This separation allows for a higher volume of transactions to fit into a block, as witness data is allotted a lesser weight, resulting in a 75% discount. For instance, a typical transaction size of 300 bytes under SegWit now contributes significantly less to the total block size.

This translates into reduced fees for users utilizing SegWit-compatible wallets, because fees are determined based on the virtual size of the transaction, which now accounts for the witness data discount.

Historical Context and Justification

The narrative behind the witness discount originates from the block size wars that occurred between 2015 and 2017. During this period, the Bitcoin community was engaged in fierce discussions about how to effectively scale the network. Increasing block sizes would enable more transactions per block, but directly raising the block size (through a hard fork) was contentious as it could centralize the network, making it challenging for nodes with limited bandwidth and storage to maintain performance.

SegWit, proposed by Pieter Wuille, emerged as a middle ground solution. It addressed the scaling dilemma by creating more “usable” block space without the requirement of a hard fork. This is where the significance of the witness discount becomes apparent. By applying a discount to the witness data, SegWit effectively allowed for more transactions to fit into a block while still ensuring backward compatibility.

In essence, SegWit provided Bitcoin with a dual advantage: increased transaction capacity without destabilizing the network.

Advantages and Disadvantages

Advantages:

Enhanced Block Efficiency: The witness discount enables a greater number of transactions per block, effectively increasing Bitcoin’s block size while ensuring compatibility with non-upgraded nodes.
Reduced Fees for SegWit Users: Since witness data is given a lower weight, transactions using SegWit are typically smaller in size, leading to lower fees for users.
Improved Security: SegWit has resolved the issue of transaction malleability, making Bitcoin transactions more secure, particularly crucial for second-layer solutions like the Lightning Network.
Better Scalability: By alleviating the data load on each transaction, the witness discount enhances the Bitcoin network’s scalability.

Disadvantages:

Increased Complexity: The SegWit implementation, including the witness discount, adds more layers of complexity to the protocol, which some in the community may consider unnecessary.
Partial Adoption: Despite the advantages of the witness discount, many wallets and exchanges have been slow to implement it, resulting in its benefits not being widely experienced.

Witness Discount Versus Direct Block Size Increase

One of the central discussions during the Bitcoin scaling debate was whether to directly increase the block size or implement solutions like SegWit, which indirectly enlarged the block size. So, how does the witness discount stack up against simply increasing the block size?

Direct Block Size Increase:

Immediately enhances the transaction capacity of a block.
Elevates the demands on nodes, requiring additional storage and bandwidth to support the network.
Calls for a hard fork, which could fragment the network (like the case with Bitcoin Cash).

Witness Discount (via SegWit):

Achieves a similar result (higher transaction capacity) without the need for a hard fork.
Lowers transaction costs for users adopting SegWit.
Imposes no extra demands on nodes, enhancing long-term sustainability.

Ultimately, the witness discount allows for more transactions per block without jeopardizing Bitcoin’s decentralization—a fundamental principle in the network’s design.

Common Questions (FAQs)

Why is the witness discount set at 75%?

The 75% witness discount exists because witness data—consisting of digital signatures—does not add to the permanent UTXO set that nodes must retain. This data is necessary solely for transaction validation and can be discarded thereafter, resulting in a diminished effect on node resources compared to non-witness data.

With the introduction of SegWit, transaction size is now quantified in weight units (WU) instead of bytes. Non-witness data has a weight of 4 WU per byte, while witness data carries a weight of 1 WU per byte, establishing a 1:4 ratio. Consequently, witness data is effectively evaluated as 25% of its original size, leading to a 75% discount.

The 1:4 weighting is a strategic balance that encourages SegWit adoption, supports network efficiency, and upholds security. It enables more transactions within a block while ensuring compatibility with prior rules, thereby enhancing Bitcoin’s scalability without sacrificing decentralization.

Do SegWit blocks tend to be larger?

Indeed, in practice, SegWit blocks can exceed the pre-SegWit limitation of 1MB. However, due to the way block weight is computed, SegWit blocks are more efficient at data storage, allowing more transactions—which are counted as having lower weight—to fit within a block.

What if I choose not to use SegWit?

Transactions that do not utilize SegWit do not receive the benefits of the witness discount, meaning they occupy more space within a block and usually incur greater fees. Nevertheless, they remain fully legitimate and can still be processed by the network.

Is the witness discount permanent?

Currently, there are no indications that the witness discount will be eliminated. It remains an integral part of Bitcoin’s strategy for scalability and is broadly regarded as a successful development that enhances the network’s efficiency without compromising its decentralization or security.

This article Understanding the Witness Discount was first published on Bitcoin Magazine and written by Conor.