Lessons from Segregated Witness: Bitcoin’s Rigidity and Layered Scaling

Michael Matulef writes on Bitcoinmagazine [2] , talked about the history of Bitcoin expansion, and believed that Bitcoin needs to carry out layered expansion without affecting the security and decentralization of the main network.

The following is the translation of the full text:

The block size war marked a key chapter in Bitcoin’s nascent history, illuminating the ability of node operators to resist systemic changes that could undermine the network’s fundamental tenets of decentralization and censorship. Key to the dispute is the issue of scaling Bitcoin to accommodate growing transaction volumes. One camp advocates sacrificing a degree of decentralization by increasing block sizes, but their opponents insist that scaling at the expense of Bitcoin’s core ethos is untenable. **

The ensuing impasse eventually led to a controversial change called Segregated Witness (SegWit). By reorganizing how transactions are stored, **SegWit provides modest capacity increases while also solving transaction scalability issues that hinder advanced functionality. **

SegWit highlights the resilience of Bitcoin’s governance model to safeguard its core values amid internal conflicts. These deliberations remain highly relevant as the debate continues over how to scale Bitcoin while respecting the decentralized and censorship-resistant properties that empower users.

“Scalability is an issue for developers and users who want to reference previous transactions in new spending transactions before they are confirmed on the blockchain. The reason this issue arises is because To spend Bitcoins created by a previous transaction, the spending transaction must reference the txid of the previous transaction. If that txid can change, the reference will fail and the spending transaction will be invalid. Specifically, transaction malleability is what hinders the Lightning Network An issue with adoption because the Lightning Network relies on the exchange of unconfirmed Bitcoin transactions.”

The activation of SegWit is a key precursor to the development of the Lightning Network. The Lightning Network is a layered scaling solution that enables fast Bitcoin payments. By settling transactions off-chain and broadcasting settlement balances only to the Bitcoin mainnet, the Lightning Network aims to enhance Bitcoin’s scalability and transaction capabilities without compromising its core security model. Since its inception, the Lightning Network has experienced significant growth as a payment method, allowing instant micropayments and highlighting Bitcoin's viability as an efficient medium of exchange.

As the Lightning Network continues to mature, it provides real-world test cases for layered scaling solutions that may shape Bitcoin’s technical roadmap to reconcile its censorship resistance, decentralized security, and mainstream Pay for utility goals.

An important lesson learned from Bitcoin’s early scaling debate is that “Bitcoin can scale in layers.”

This design philosophy recognizes that Bitcoin’s base layer is a secure, decentralized foundation, while it is the higher-level, Layer 2 protocols that support expanded functionality and transaction capacity. **By leveraging the base layer as a trust anchor, innovative solutions can be developed to increase Bitcoin’s scalability and usage without compromising its core values of decentralization and censorship resistance. **As Bitcoin matures, the layered scaling model is designed to meet mainstream utility and payment efficiency goals while respecting the consensus-driven governance and security guarantees provided by its permissionless architecture. As technology continues to advance, **Layer 2 innovation may provide a path for Bitcoin to reach global scale of use while adhering to its fundamental principles. **

While the “Bitcoin layered scaling” paradigm is a constructive conceptual step, some interpret it dogmatically as an excuse for the complete rigidity of Bitcoin’s base layer. Overzealous in minimizing risk and preserving Bitcoin as the original [SoV store of value] ("SoV store of value"), they believe that no more changes should be made to the underlying protocol. However, this extreme position ignores nuance and unintended consequences. Strictly limiting functionality expansion to higher layers could ultimately undermine Bitcoin’s self-sovereignty and censorship resistance—qualities so highly valued by today’s users. As transaction fees and congestion at the base layer increase over time, only wealthier entities will have the ability to connect directly to the base layer, funneling everyday users to hosted solutions. While cautious and conservative progress is prudent, blindly rejecting any base layer enhancements out of paranoia may inadvertently centralize Bitcoin in the long term and disempower ordinary users. There is a trade-off between scaling ambition and technical stability, but reflexive rigidity prevents nuanced cost-benefit analysis of proposals that might sensibly improve user experience without sacrificing decentralization.

**Bitcoin’s core value proposition stems from its ability to provide users with true self-sovereignty and censorship resistance. **By design, Bitcoin gives users independent control of their own funds, eliminating reliance on external third parties such as banks or governments for transaction verification or escrow. Users can truly own their own Bitcoins, holding private keys, making payments irreversible and uninterrupted. This makes Bitcoin the first permissionless and politically neutral monetary system that maintains financial autonomy regardless of nationality or institutional status. In contrast to traditional finance, no central authority can easily freeze, seize, or block payments on the Bitcoin network. These interconnected properties promote decentralization and mitigate systemic risk because Bitcoin has no single point of failure and is resilient even in hostile environments. Users no longer have to absolutely trust external institutions to participate in finance – Bitcoin enables direct peer-to-peer electronic cash on a global scale. The oft-quoted phrase “Not your key, Not your money” neatly sums up the self-sovereignty, censorship resistance, and ability to escape permissioned systems that Bitcoin offers.

As Bitcoin becomes more widely adopted, there are economic constraints on scaling capacity to meet growing transaction demand. Bitcoin’s block space is inherently limited, and more usage will bring more competition for this scarce resource. Basic supply and demand dynamics suggest that as global utilization grows, fees will rise unpredictably, excluding smaller transactions. While initially absorbable, continued fee increases can create externalities that impact Bitcoin’s accessibility and ethos. High fees make on-chain transactions impossible for ordinary users, forcing them to turn to custodial services, which goes against Bitcoin’s self-sovereign premise.

Quoting [Anthony Towns's article: Putting a B in BTC]("Anthony Towns "Anthony Towns's article: Putting a B in BTC"): Put B into BTC ")

“The space there is not unlimited – expect it to manifest as fee pressure and backlog and a reduced ability to resolve transaction storms quickly. This in turn will make it difficult for people with small amounts of capital to continue to self-custody on the main chain And expensive. At that point, acquiring new high-value users means pricing out existing low-value users.”

To quote James O'Beirne in his article: Thoughts on Scaling and Consensus Change [3]

"The big thing to say loudly here is that when 1 billion people want to use Bitcoin, the transaction costs on the main chain will be very expensive. Note that I said "very expensive" not "impossibly expensive" because if Users lose the ability to take some form of Layer 1 physical custody, and Bitcoin becomes just less frictional gold: paper markets will develop, and all the good properties of paper markets will develop. Bitcoin will will decrease”

Finally, the immortal Hal Finney said this in 2010 [4] ：

“In fact, there is a very good reason for Bitcoin-backed banks to exist, to issue their own digital cash currencies that can be exchanged for Bitcoin. Bitcoin itself cannot scale to broadcast every financial transaction in the world to everyone and contain In the blockchain. There is a need for a lighter and more efficient secondary payment system. Likewise, the time it takes for a Bitcoin transaction to complete is impractical for medium to large purchases.

Bitcoin-backed banks will solve these problems. They can function like banks before nationalization of the currency. Different banks may have different policies, some more aggressive and some more conservative. Some are fractional reserve, while others may be 100% Bitcoin backed. Interest rates may vary. Cash transactions from some banks may be discounted compared to cash from other banks.

George Serkin elaborated on the theory of competitive free banking, arguing that such a system would be stable, anti-inflationary, and self-regulating.

I believe this will be Bitcoin's ultimate destiny, becoming a "high-performance currency" as a reserve currency for banks that issue their own digital cash. Most Bitcoin transactions will be between banks to settle net transfers. Private Bitcoin transactions will be as rare as Bitcoin-based purchases are today. "

The resolution of this pressing economic dilemma remains shrouded in uncertainty. While we may discover innovative technological engineering solutions, it is equally likely that this dilemma is rooted in a fundamental, unavoidable economic constraint—a true constant that requires recognition and adaptation at all echelons. **We must prepare for the prospect that certain economic trade-offs and constraints are intrinsically built into the fabric of our current system. **If we are to regard custody as inevitable, our first responsibility is to strive to impose strict constraints on custodians, effectively curb risks, and at the same time cultivate a mature ecosystem with positive free market economic incentives. Furthermore, they must fortify themselves against the encroachment of state authority and retain their autonomy to ensure unfettered participation in unfettered free markets. No matter where one stands on the scalability of self-hosting or the inevitability of hosting, the most important thing is to fight ossification vigorously for as long as possible.

The most important lesson to be learned from the crucible of the block size war is that Bitcoin’s scaling requires enhancements at its fundamental level. Without significant upgrades to Segregated Witness (SegWit), the emergence of this transformative development of the Lightning Network will remain a pipe dream. This highlights a key correlation: the functionality of the secondary layer is inseparable from the functionality of the mainnet protocol. If we aspire to self-custodial scalability and impose restrictions on custodians, remain firmly committed to free market incentives, and resist state coercion through strong censorship, then Bitcoin’s development must continue.

Let me clarify that my position does not advocate supporting reckless behavior or indiscriminate implementation of every proposed change. Instead, we should take an extremely cautious approach and review each proposal carefully and meticulously. Our overall mindset should revolve around the question of how to modify elements that we may be hesitant about but feel are imperative. Key to this approach is creating an environment of open and constructive dialogue within our community. Unfortunately, the presence of malicious actors, and their deceptive marketing tactics, poses a significant obstacle to our growth efforts. Not only do they consume our precious time, but they divert the attention of those who are truly seeking knowledge. We have a responsibility to actively contribute to creating authentic spaces where meaningful discussions can take place and individuals can engage in ongoing learning.

Maybe my argument about the need for Bitcoin change hasn’t convinced you yet. You may decide that your current situation is satisfactory and that the potential risks associated with unknown uncertainties outweigh any challenges encountered in scaling. You're right in that if enough people agree with you, we may indeed have reached a point where protocols become ossified and we have to adapt to that reality accordingly.

Bitcoin’s ongoing narrative remains an unfolding story. As this groundbreaking economic innovation continues to mature, its precise trajectory remains a mystery, subject to numerous unpredictable and diverse influences. While Bitcoin’s decentralized structure prevents any single entity from exercising absolute control, individuals operating nodes have significant influence over its processes. Their values, philosophies, and vision for Bitcoin’s future will inevitably leave their mark on the protocols and systems they choose to adopt.

**Bitcoin’s future is yet to be written, and only time will reveal its ultimate direction. **