Segregated Witness (SegWit) is mostly known as a bug fix that was needed to make Bitcoin’s Lightning Network work more efficiently. But one of the changes that it brought was an effective block size limit increase.





An increase in the amount of data that can be processed by the Bitcoin network every ten minutes also means the peer-to-peer digital cash system can process more transactions per second, as long as people decide to use the new, SegWit-enabled transaction type.





There is also an incentive mechanism for getting Bitcoin users to move over to wallets that support SegWit. This incentive is in the form of a discounted fee rate on SegWit transactions. However, despite that economic incentive, the majority of transactions on the network still don’t use SegWit.





SegWit was originally enabled on the Bitcoin network in August of 2017, but the most recent data from transactionfee.info indicates only 48.1% of Bitcoin payments take advantage of the upgrade. That said, SegWit payments as a percentage of total Bitcoin payments hit an all-time high of 48.83% earlier this week.





According to Blockchair, SegWit transactions are still off from their all-time high. Blockchair measures SegWit adoption as a percentage of sent Bitcoin transactions, while transactionfee.info focuses on payments. In Bitcoin, payments are measured as the number of outputs in a transaction subtracted by one.





Put another way, Blockchair’s data can be seen as a measurement of SegWit Bitcoin sent, while transactionfee.info’s data can be seen as a measurement of SegWit Bitcoin received.





So, what caused this recent increase in SegWit payments? At first glance, one might assume the recent increase in Bitcoin transaction costs are to blame, but it’s not as simple as that.





Did Higher Fees Lead to More SegWit Transactions?





According to data from Coin Metrics, Bitcoin’s USD-denominated median transaction fee first broke away from its months-long stagnation at around $0.10 in April, but the fees were still below $1.00 for the vast majority of the month.





In May, Bitcoin transaction fees rose much more substantially, climbing from $0.54 on May 1 to $2.36 on May 31. The percentage of Bitcoin payments that were SegWit-enabled also rose from 40.41% on May 1 to 45.71% on May 18. This sudden rise in SegWit payments was a bit out of the ordinary, and as mentioned previously, SegWit payments continued to steadily climb to an all-time high as of this week. SegWit-enabled Bitcoin transactions also rose from 35% to 41% of all Bitcoin transactions around this time.





This small bit of data may lead some to believe that higher transaction fees led to Bitcoin users seeking out SegWit-enabled wallets, but there is another key factor that needs to be considered: VeriBlock.





VeriBlock is a project that piggybacks on top of the Bitcoin blockchain in an effort to provide a higher level of security for alternative chains. As a simplified explanation, VeriBlock works by embedding the state of an altcoin’s network into the Bitcoin blockchain. This process is known as proof-of-proof (Pop), and it is used by smaller cryptocurrency networks to guard against potential 51% attacks.





Although the rise in SegWit-enabled payments in early May was indeed a bit abnormal, there was another period of time in March where there a sharp increase and then later a sharp decline occurred in the percentage of Bitcoin payments that were SegWit enabled. This period of time can be easily seen as a sort of plateau in the below chart.









During that period in March, the VeriBlock testnet was turned off and the mainnet was eventually activated. Veriblock has been known to account for 20% or more of all daily Bitcoin transactions, and these special transactions do not use SegWit. In other words, the percentage of SegWit payments increased on the network in March because VeriBlock was not using Bitcoin at the time.





Now, getting back to SegWit’s all-time high levels of use, it should be noted that VeriBlock is structured so that it will create fewer Bitcoin transactions as Bitcoin transaction fees rise. A side effect of this is that SegWit payments will increase as a percentage of total Bitcoin payments. As non-SegWit VeriBlock transactions decline, the percentage of SegWit payments on the network should increase.





Indeed, as SegWit payments are near all-time highs, the percentage of Verblock transactions is below 10% at the time of this writing, according to Veriblock’s network stats page. Notably, the rise in the percentage of Bitcoin payments that are SegWit-enabled since fees increased (around nine percentage points) is somewhat close to the decline in VeriBlock’s share of daily Bitcoin transactions (anywhere from eight to 12 percentage points at any given moment).





While this is not to say that there weren’t any users who decided to switch to a SegWit-enabled wallet as fees have risen over the past few months, it appears that VeriBlock’s declining use of the Bitcoin blockchain may be the major factor in the recent increase in the percentage of Bitcoin payments that use SegWit.





The increase in fees, however, can still be seen as the root cause because that’s what led to VeriBlock’s decreased use of Bitcoin transactions in the first place.





SegWit Adoption Should Increase Further When High Fees Return





With all of this said, the point remains that increased fees on the Bitcoin network should lead to more users switching to SegWit over time. It’s likely that fees have simply not reached the point at which fees are enough of an issue to make users take the time to switch to alternative wallets.





There is plenty of anecdotal evidence that increased fees have altered the behavior of users, exchanges, wallet developers and other entities that interact with the Bitcoin network in the past. For example, the high fees found on the Bitcoin network in early 2018 forced multiple companies, such as Coinbase and Bitpay, to optimize how they were interacting with the Bitcoin blockchain. The percentage of Bitcoin payments that used SegWit increased from 7% to 25% around this time period, which was also only a few months after SegWit functionality had been enabled on the network.





It could be argued that increased fee pressure and general network congestion led to the activation of SegWit in the first place. Many economically-relevant nodes simply wanted some kind of increase in capacity on the network to occur (whether through a block size increase or more flexible layer-two protocols), and for a variety of reasons, SegWit ended up being the Schelling point that could gain a sufficient level of acceptance by nodes on the network.





For now, fees are not at the top of the list of concerns for Bitcoin users, at least according to BitPay CEO Stephen Pair and Blockchain CEO Peter Smith. Both CEOs recently made comments regarding their reasons for still not integrating SegWit into their platforms. In their statements, Pair and Smith indicated their users are simply demanding other services and features at this time.





While fees may still be too low to push more business and users to SegWit today, it would be hard to imagine such a migration would not occur if fees returned to the $10 to $30 levels that were seen in late 2017 and early 2018. That said, as past fluctuations in the Bitcoin transaction fee market have shown, priorities can change rather quickly.





Notably, Blockchain would be able to take SegWit adoption to or around the 70% level by itself if such a fee event did occur due to its large, albeit somewhat declining, share of the overall Bitcoin wallet market.



