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What “SegWit on Coinbase” Might Mean to You

Robert DeVoe
Last updated: | 3 min read

Coinbase, one of the most popular crypto exchanges that allows people to purchase bitcoin, Ethereum, Litecoin, and Bitcoin Cash has finally announced that they will soon be implementing SegWit. Coinbase is quite late to the party, however, as the SegWit upgrade has been available for quite some time already. Many in the cryptocurrency world have accused Coinbase of being largely responsible for the large backlog of unconfirmed transactions seen recently, due to their insistence on not implementing SegWit promptly.

In this article, we’re going to go over briefly what SegWit is, and what this news could mean for the cryptocurrency world as a whole.

What is SegWit?

SegWit, also known as segregated witness, is an upgrade that was done to the bitcoin network last year. It allows for transactions to be done with a much smaller size, and therefore have much lower fees.

A large number of bitcoin exchanges and wallets have already upgraded to include SegWit, but the upgrade is still not universal across the network. Other cryptocurrencies that are based on bitcoin, such as Litecoin and Vertcoin, have already instituted SegWit on a broad scale and consequently fees on those networks are significantly lower.

In recent months, the pool of unconfirmed transactions on the bitcoin network has been growing to astounding levels, often exceeding 400,000 transactions. While that seems to have cooled off in recent days to about 8,000 at press time, it is still a potentially recurring problem that could come back at any time.

If a major exchange that a large majority of cryptocurrency users use, such as Coinbase, switches to SegWit, we could see many tens of thousands or more unconfirmed transactions disappear from that list during peak activity periods.

Bitcoin Block Space Essential To Network Speed

As each bitcoin block is only 1 MB in size, keeping transaction sizes as small as possible becomes essential. As SegWit allows for transactions to be smaller, they consequently consume less space.

To visualize this issue, think of a subway car in which 100 people all want to get on at the same time. If everyone has a backpack and a big puffy coat on, fewer people will be able to fit on the train overall. SegWit, in this example, is essentially like having all those people not bring their backpacks and heavy coats so that more people can fit on the train at once.

Another important change could be that Coinbase users, when making withdrawals from their Coinbase accounts, could see much lower transaction fees when withdrawing or sending bitcoin. We checked and as of this writing, a withdrawal of 0.05 BTC would cost about USD 2.80, which is still significantly higher than withdrawing Litecoin or Ethereum from Coinbase.

Coinbase Vice President and GM Dan Romero notes that the upgrade should “help reduce the fees customers pay on bitcoin transactions.”

Why so slow to upgrade?

Many in the cryptocurrency world are asking why Coinbase took such a long time to even consider implementing SegWit. Case in point, even to this day they still have not successfully enabled SegWit.

Specifically, in the official Coinbase blog, Romero writes:

“We store billions of dollars worth of bitcoin on behalf of customers and any change to our infrastructure is done with significant planning and consideration for the security and stability of our platform.”

It should be noted that to this day, Coinbase has still not been successfully hacked, therefore their approach to security made still be laudable, if inconvenient for users.

No matter the motivation, this comes as good news for all users of Coinbase, as well as bitcoin users in general. This is because even if you do not use Coinbase, Coinbase represents such a large portion of bitcoin transactions that its use of SegWit could increase the efficiency of the network overall.

Batching Still Desperately Needed

While SegWit is a positive step forward for getting transaction sizes and fees under control, it is not by itself a complete solution. Many in the cryptocurrency community have been asking Coinbase to begin batching it’s transactions.

In simple terms, batching transactions means that Coinbase should combine many outgoing transactions together, so that fees are lower, and the network suffers from less stress.

Perhaps a three-punch combo of SegWit, batching, and Lightning Network are really needed in order to fully address the scaling issues we are seeing today. While the move to implement SegWit is a great start, still more work will need to be done down the line.