Segregated Witness proposes to distribute value, but does it really see the value of bitcoin?
In a bid to resolve bitcoin’s underlying scaling issue, different parties have been proposing to scale in different ways. Among these proposals is Bitcoin Core’s Segregated Witness, or SegWit, whose main goal is to send signature data or witnesses off-chain and onto second layers like the Lightning Network or sidechains to fit more transactions into the current 1MB block size.
SegWit will not deliver
Many experts have already poked holes in SegWit’s “unworkable” schemes. Its use of a 1:4 ratio has already been pointed out as a political decision that will bind bitcoin’s trajectory for years regardless of technical factors. From a legal perspective, separating and discarding signature data creates more practical problems in the business world as it would make legal proof significantly more difficult.
But more importantly, SegWit does not fundamentally understand—let alone appreciate—that the true value of bitcoin lies in the relationship between use and demand, said Dr. Craig Wright, chief scientist for nChain.
In a new research paper, the Australian academic and inventor compared bitcoin’s current 1MB block size limit to that of an eight-lane highway with a single broken tollbooth—the bitcoin system is not broken, but it needs to open up to as many users as possible. To do this, increasing the block size is needed, something that SegWit will not be able to do.
At most, SegWit is a short-term supposed solution that will not create the velocity of use needed to drive up the market price of bitcoin to its highest potential, while SegWit2x will only modestly increase the block size to 2MB.
Sidechains, on the other hand, reduce scarcity, which, in turn, create inflation, Wright said. It also introduces risk and encourages unnecessary complexity as it effectively produces multiple monies within one system.
One true solution
“The limitation of segregated witness and its ability to introduce sidechains to bitcoin removes the key aspects of scarcity from the system,” wrote Wright. And without scarcity, bitcoin may as well be PayPal or any bank or credit system.
“Once we start to realise that it is scarcity that makes bitcoin valuable, and that coupled with the ability to trade quickly, safely, and across borders, we start to understand that any addition to the protocol that removes scarcity, and lowers the velocity, will limit the value that can be traded market,” he stated.
And since SegWit presents only the illusion of scale, this leaves the bitcoin community with one true—simple—solution: increase the block size.
Current bitcoin price
Bitcoin’s trading price is up at $2,414.19 per coin on Thursday.