Segwit adoption tapers off after rapid early growth

The share of Bitcoin transactions that utilize Segregated Witness (Segwit) has steadily grown from August 2017 when it was activated to more than 40% a year later. However, in the past five months, the growth of Segwit adoption appears to have stalled as the share of Segwit transactions stays in the range of 40-50%.

Segwit is a soft fork protocol upgrade to fix all forms of malleability and increase the block capacity. The Segwit transactions use different signatures and redeem scripts that are moved to a new structure, which doesn’t count towards a block size limit of 1MB. Depending on the parameters, Segwit transactions are at least 25% smaller in size when compared to legacy transactions. Therefore, the blocks are still the same size but they can fit more Segwit transactions. Since they are smaller and the fee is determined by size, the Segwit transactions naturally cost less. Basically a smaller fee can achieve the same speed as legacy transactions.

So why is Segwit adoption stagnating? The most rational reason seems to be the lack of urgency combined with cost cutting in the bear market. The mempool has been fairly empty since February 2018 (see chart) and the median fees have only rarely surpassed $0.20 since then. The fees are low because the demand for sending bitcoin decreased and large businesses have implemented cost optimization measures such as batching, which greatly decreased the output. Segwit’s largest advantage is the reduction of transaction fees but since the fees are already low regardless, there's relatively little need to upgrade all the wallets to Segwit.

Source: Jochen Hoenicke While some of the largest businesses have added support for Segwit, there are still several that don’t. Binance, the consistently largest exchange by volume, has yet to implement Segwit. BitMEX, Gemini, and Bittrex also don’t support Segwit yet. Similarly Blockchain, a popular cryptocurrency wallet provider that has nearly 32 million user wallets, still hasn’t implemented Segwit. It’s likely that if Binance, BitMEX and Blockchain started supporting Segwit sends and receives for all customers, the share of Segwit transactions would increase significantly.

And realistically, there simply aren’t enough incentives for these large businesses to do so yet; other than having a good PR story. The relatively small decrease in transaction fees doesn’t justify the monetary or time costs required to upgrade all wallets. Replacing legacy addresses and migrating them to Segwit is a very cumbersome process for exchanges. Moreover, some exchanges that already support Segwit are charging their customers higher fees than Binance, which doesn’t. Unless there is a specific stimulus such as public pressure or the mempool filling up again, it’s unlikely that this will change any time soon. Especially in the bear market when businesses are trying to cut costs and only deploy capital where it’s absolutely necessary.

The largest cost cutting came from batching, or aggregating many outputs into a single transaction, which can save up to 80% of size and therefore costs. The vast majority of exchanges have already implemented this technique (see table). Gemini, which is one of the few that haven’t deployed batching for Bitcoin transactions yet said that they should have “support for Segwit, transaction batching, Bech32 addresses” ready in Q1.

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Segwit adoption tapers off after rapid early growth

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