What is SegWit
SegWit is short for segregated witnesses and it is a proposal presented by the Bitcoin Core team. It comes in the form of a soft fork, a forward compatible upgrade that can work even if some users don’t update their software (without resulting in a chain split). It was released on the 0.13.1 version of Bitcoin Core client.
In transactions there are three key elements. The sender, receiver and the signatures (commonly referred to as witnesses) and these make up a big part of the transaction size. Contrary to popular belief, however, SegWit does not seperate this witness data into a “witness block”.
Instead, Segwit updates the 1MB block size limit into a 4 million unit block weight limit, counting serialised witness data as one unit and core block data as four units. It essentially introduces a new transaction format.
What this means is that the block size is actually increased. SegWit counts each byte in a witness as 0.25 bytes towards the maximum block size limit (1MB), meaning the maximum size of a block becomes just under 4MB. This doesn’t mean that the data gets smaller, it simply means that it is counted in a way that allows for the 1MB limit to be increased. This change, however, only affects witness data and each non-witness byte is still counted as 1 byte towards the maximum block size limit (1MB) or as 4 units towards a maximum block weight of 4M units.