So how does this work more specifically? Transaction data consist of two components; input, which is the public address of the sender, and output, which is the public address of the receiver. In the input data there is a so called signature, which verifies that the sender has the required funds for the transaction. The problem, however, is that this signature takes up the majority of the space in the transaction. With more and more Bitcoin transactions being made, more blocks must be added to the blockchain as the block size limit is only 1 MB which means that only a certain amount of transactions can be included in one block. Naturally, this limitation is slowing down the network as the weight of the transactions that are piling up causes delays in the process.

What SegWit does is that it separates the signature from the input data, and instead moves it to a structure at the end of the transaction. By removing the signature data, it is possible to fit transactions that would normally take up 4 MB into one 1 MB block. So, the segregated witness does not increase the block size, but makes room for more transactions in one block. By making a transaction smaller, the transaction fee is naturally also reduced. Furthermore, SegWit also prevents the risk of the receiver modifying the sender’s transaction ID since it cannot be changed when detached from the input. Therefore, with a SegWit address you can reduce the risk of getting rid of more coins than what you originally sent.