Understanding SegWit — Bitcoin. SegWit Decoding: Strengthening Bitcoin… | Posted by Abhishek Chauhan | Coins | December 2023

By Crypto Gloom On Dec 11, 2023

SegWit Decoding: Improving Bitcoin’s Scalability and Efficiency

Launched in 2017, SegWit solves Bitcoin’s scalability issues by modifying the way data is stored on the blockchain. Traditional Bitcoin transactions included both transaction data and signature data (witnesses) in the same structure. SegWit separates witnesses from transaction blocks, effectively reducing transaction size and increasing the capacity of blocks to hold more transactions.

Increased block capacity: SegWit effectively increases the number of transactions that can enter a block by removing signature data from transaction inputs.
Low Fees: Smaller transaction sizes lower transaction fees, making Bitcoin trading more cost-effective.
Enhanced Security: SegWit solves the malleability problem, where an attacker can change a transaction ID without changing its content.

Micropayments: SegWit makes microtransactions more feasible with lower fees and is suitable for applications that require frequent, small transfers.
High-frequency trading platform: Exchanges and trading platforms benefit from faster transaction processing times and reduced costs.
Wallet Services: Wallet providers can provide more efficient transaction services, increasing user satisfaction and competitiveness.
Payment Processor: Businesses will be able to process Bitcoin payments more efficiently, encouraging widespread adoption of Bitcoin as a payment method.

When we talk about Segregated Witness (SegWit) addresses in Bitcoin, there are two types.

Default SegWit address (bech32): It starts with: bc1.
Nested SegWit addresses (P2SH-P2WPKH): It starts with: 3 Compatible with older systems that do not support native SegWit addresses.

Here we will focus on generating Nested SegWit addresses (P2SH-P2WPKH), which are simpler and provide wider compatibility.

Import the Bitcore library and generate keys: First bitcore-lib This library is essential for Bitcoin operation. It then generates a private key and derives the corresponding public key from it.

const bitcore = require('bitcore-lib');// Generate a Private Key
let privateKey = new bitcore.PrivateKey();
// Derive the Public Key from the Private Key
let publicKey = privateKey.toPublicKey();

2. Write a witness script: This is a script that defines how to prove ownership of Bitcoin. In SegWit, this part is separated (or “separated”) from the main part of the transaction.

let witnessScript = bitcore.Script.buildWitnessV0Out(publicKey);

3. Create a P2SH script: This script wraps the surveillance script with a standard Pay-to-Script-Hash structure. This is equivalent to putting the SegWit portion into a container that is compatible with the existing Bitcoin system.

let scriptPubKey = bitcore.Script.buildScriptHashOut(witnessScript);

4. Address Generation: This step converts the script into a standard Bitcoin address.

let address = bitcore.Address(scriptPubKey, bitcore.Networks.mainnet);

5. Combine everything into a function: This function puts all the steps together and returns a new SegWit address and private key.

function generateP2SHP2WPKHAddress() 
let privateKey = new bitcore.PrivateKey();
let publicKey = privateKey.toPublicKey();
let witnessScript = bitcore.Script.buildWitnessV0Out(publicKey);
let scriptPubKey = bitcore.Script.buildScriptHashOut(witnessScript);
let address = bitcore.Address(scriptPubKey, bitcore.Networks.mainnet);return 
privateKey: privateKey.toWIF(),
address: address.toString()
;

Example of use

Running this function will generate a new SegWit address and corresponding private key.

let segwitAddress = generateP2SHP2WPKHAddress();
console.log('SegWit Address:', segwitAddress.address);
console.log('Private Key (WIF):', segwitAddress.privateKey);

Implementing SegWit in Bitcoin applications not only contributes to the efficiency of the Bitcoin network, but also opens up new possibilities for developers to create more scalable, secure, and efficient applications. As the Bitcoin ecosystem continues to grow, staying ahead of developments like SegWit is essential for developers looking to make their mark in the cryptocurrency world.