Why Coinbase is Being Accused of Overloading the Bitcoin Network

On February 5, the Coinbase cryptocurrency exchange posted a tweet claiming that “The engineering team has begun the final testing phase of SegWit,” and “SegWit compatible Bitcoin sends/receives will be available for customers in the next few weeks.”

Coinbase announced that it had started work on SegWit in early December last year, answering a gag question from a user “How many Coinbase engineers does it take to implement SegWit?”

On December 16, Coinbase vice-president Dan Romero published a post on the official Coinbase blog, stating that the introduction of SegWit was planned for 2018 and that the team was currently working on its “safe implementation.” Romero emphasized that “Security and efficient work of the exchange are top priority” and refused to speak about specific terms.

Riding the crest of December’s Bitcoin mania, however, users’ discontent grew with the network’s overload as exchanges, including Coinbase and GDAX, were unable to cope with record demand and went offline, resulting in fee and transaction time increases. In mid-January, clients sent Coinbase CEO Bryan Armstrong a petition containing more than 12,000 signatures, calling for support of SegWit as a priority for 2018. Jameson Lopp, the lead engineer of the BitGo crypto wallet, called on users to refrain from Coinbase’s services by stating “It’s not a new revelation that a significant cause of bitcoin network congestion is from popular services such as Blockchain, Coinbase, and Gemini who are using block space inefficiently. If you don’t want to contribute to the problem, don’t use them” Armstrong responded to the accusation by saying that “Coinbase is working on batching transactions, SegWit, and a number of other strategies to improve transaction backlog.”

How Can SegWit Solve the Bitcoin Network’s Scalability Problem?

SegWit aims to solve the scalability problem by reducing the size of transactions. The protocol was proposed by the developer of Blockstream Peter Welle, while the soft fork that made the use of SegWit possible took place in the Bitcoin network in August of last year. Among the services that already support the technology are the Ledger, Trezor, Electrum, and Samourai wallets, as well as the crypto exchanges HitBTC, ShapeShift, and Bitstamp.

To understand how SegWit helps the suffering Bitcoin network, one needs to start at the lowest levels by imagining the usual routine of Bitcoin transactions that travel the Bitcoin network in the form of “packages of information,” while their authenticity and correctness is checked by nodes. If all the nodes agree that the transaction is correct, then a consensus is reached. The transaction itself consists of two parts in the form of an input and an output, the first of which is responsible for “unlocking,” that is, obtaining Bitcoins (and contains information about the sender), and the second is responsible for “locking” for potential future transfer. The input data also contains a signature certifying the correspondence of the private and public keys.

SegWit Technology (Segregated Witness) splits transaction into two parts and transports the signature (“witness”) required for “unlocking” the Bitcoins obtained at the end of the transaction outside the main block. In this case, the main block contains data about the recipient and the sender, and the “witness” contains scripts and signatures, that is, information that is needed to confirm the transaction, but will never be used in the future. Taking into account that the signatures occupy about 60% of a transaction’s volume, their isolation substantially reduces the block size, thereby increasing the network bandwidth and reducing the cost of transaction fees.

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