SegWit Bech32 reshapes Bitcoin transaction costs

Bitcoin users have steadily shifted to a quieter but consequential upgrade that cuts fees and improves network efficiency without altering the asset’s core monetary rules. Segregated Witness, commonly known as SegWit, combined with the Bech32 address format, has changed how transaction data is structured and transmitted, allowing more payments to fit into each block and lowering the cost paid by users sending funds across the network.

SegWit was introduced to tackle a long-standing bottleneck in Bitcoin’s design. Each block on the blockchain has a fixed size limit, which historically constrained the number of transactions that could be confirmed every ten minutes. As usage grew, competition for block space intensified, pushing up transaction fees during periods of congestion. SegWit addressed this by separating, or segregating, a portion of transaction data known as the “witness” from the main body of the transaction. This witness data contains cryptographic signatures that prove ownership of funds but do not need to be processed in the same way as other transaction elements.

By moving signatures outside the traditional block structure, SegWit effectively increased the amount of transaction data that can be included in each block without formally raising the block size limit. The network now measures transactions using “block weight”, a system that discounts witness data. As a result, transactions that use SegWit take up less effective space, allowing miners to include more of them per block and easing pressure on fees.

Bech32 builds on this change by introducing a new address format specifically designed to work efficiently with SegWit. Traditional Bitcoin addresses, which often begin with a “1” or “3”, were created long before SegWit and do not fully benefit from its data-saving structure. Bech32 addresses, typically starting with “bc1”, are encoded in a way that is more compact and less prone to user error. They avoid mixed-case characters and include stronger error detection, reducing the risk of funds being sent to an invalid address.

The cost advantage becomes clear at the point of transaction. Bitcoin fees are calculated based on the amount of data a transaction occupies, measured in virtual bytes rather than the value being transferred. A SegWit transaction sent to a Bech32 address uses fewer virtual bytes than a comparable legacy transaction. This means users can attach a lower fee while maintaining the same priority for confirmation, an outcome that appeals both to small retail users and to businesses processing large volumes of payments.

Beyond lower fees, SegWit solved a technical issue known as transaction malleability, where the transaction ID could be altered before confirmation without changing the transaction’s content. This quirk complicated the development of more advanced payment systems. By fixing malleability, SegWit paved the way for second-layer technologies such as the Lightning Network, which allows users to open payment channels and transact off-chain with near-instant settlement and minimal fees, settling only the final balance on the main blockchain.

Adoption has been gradual rather than immediate, reflecting Bitcoin’s conservative culture and the need for wallets, exchanges and payment processors to update their software. Over time, major exchanges and custodial services have enabled SegWit withdrawals, while most modern wallets default to Bech32 addresses. As usage has increased, the proportion of SegWit transactions on the network has climbed, contributing to lower average fees during normal market conditions.

The shift also has implications for miners. While SegWit reduces the fee paid per individual transaction, it allows miners to include more transactions in each block, potentially maintaining or even increasing total fee revenue over time. This balance is important as Bitcoin moves towards an era where block subsidies decline and transaction fees play a larger role in securing the network.