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I've been asked one question quite regularly and recently with more force.
The question is about Segregated Witness and specifically what a hard
fork based version would look like.


This is available online at my blog;
  http://zander.github.io/posts/Flexible_Transactions/

But I'll publish the actual text here as well, hoping to hear from others in 
the Bitcoin industry what they think about this approach.




Segregated Witness (or SegWit for short) is complex. It tries to solve
quite a lot of completely different and not related issues and it tries to
do this in a backwards compatible manner. Not a small feat!

So, what exactly does SegWit try to solve? We can find info of that in the
[benefits](https://bitcoincore.org/en/2016/01/26/segwit-benefits/) document.

* Malleability Fixes
* Linear scaling of sighash operations
* Signing of input values
* Increased security for multisig via pay-to-script-hash (P2SH)
* Script versioning
* Reducing UTXO growth
* Compact fraud proofs

As mentioned above, SegWit tries to solve these problems in a backwards
compatible way. This requirement is there only because the authors of
SegWit set themselves this requirement. They set this because they wished
to use a softfork to roll out this protocol upgrade.
**This post is going to attempt to answer the question if that is indeed
the best way of solving these problems.**


Starting with Malleability, the problem is that a transaction between being
created by the owner of the funds and being mined in a block is possible to
change in such a way that it still is valid, but the transaction identifier
(TX-id) has been changed. But before we dive into the deep, lets have some
general look at the transaction data first.

If we look at a
[Transaction](http://bitcoinfactswiki.github.io/Transaction) as it is
today, we notice some issues.

<table>
<tr><td colspan=2>Version</td><td>4 bytes</td></tr>
<tr><td colspan=2>Number of inputs</td><td>VarInt (between 1 and 9 
bytes)</td></tr>
<tr><td rowspan=5 class=vertical>inputs</td><td>Prev transaction 
hash</td><td>32 bytes.
            <font color="red">Stored in reverse</font></td></tr>
<tr><td>Prev transaction index</td><td>4 bytes</td></tr>
<tr><td>TX-in script length</td><td><font color=red>Compact-
int</font></td></tr>
<tr><td>TX-in script</td><td>This is the witness data</td></tr>
<tr><td>Sequence-no/<a 
href="https://github.com/bitcoin/bips/blob/master/bip-0068.mediawiki">CSV</a>
  </td><td>4 bytes</td></tr>
<tr><td colspan=2>Number of outputs</td><td>VarInt (between 1 and 9 
byte)</td></tr>
<tr><td rowspan=3 class=vertical>outputs</td><td>Value</td><td>Var 
int</td></tr>
<tr><td>TX-out script length</td><td><font color=red>Compact-
int</font></td></tr>
<tr><td>TX-out script</td><td>bytearray</td></tr>
<tr><td colspan=2>NLockTime</td><td>4 bytes</td></tr>
</table>
</table>

The original transaction format as designed by
[Satoshi Nakamoto](http://bitcoinfactswiki.github.io/Satoshi_Nakamoto/)
had a 4 byte version. This design approach is common in the industry and
the way that this is used is that a new version is defined whenever any
field in the data structure needs changing.  In Bitcoin we have not done
this and we are still at version 1.

What Bitcoin has done instead is make small, semi backwards-compatible, 
changes.
For instance the [CHECKSEQUENCEVERIFY]
(http://bitcoinfactswiki.github.io/Script/#Locktime)
feature repurposes the sequence field as a way to add data
that would not break old clients.  Incidentally, this specific change
(described in BIP68)
is not backwards compatible in the main clients as it depends on a
transaction version number being greater than 1, they all check for
Standard transactions and say that only version 1 is standard.

The design of having a version number implies that the designer wanted to
use hard forks for changes. A new client is required to know how to parse a
newly designed data structure, this should be obvious. So the idea is to
change the version number and so older clients would know they can't parse
this new transaction version. To keep operating, everyone would have to
upgrade to a client that supports this new transaction version.

Lets look at why we would want to change the version; I marked some items in
red that are confusing. Most specifically is that numbers are stored in 3
different, incompatible formats in transactions. Not really great and
certainly a source of bugs.

Transactions are cryptographically signed by the owner of the coin so
others can validate that he is actually allowed to move the coins.
The signature is stored in the `TX-in-script`.  
Crypto-geeks may have noticed something weird that goes against any
textbooks knowledge.  What this is is that a digital
signature has to be placed outside of the thing it signs. This is because
a digital signature protects against changes. But a signature itself would
cause this change. So you have to store the signature outside the thing you
sign.

Bitcoin's creator did something smart with how transactions are actually
signed so the signature actually doesn't have to be outside the
transaction. It works. Mostly. But we want it to work flawlessly
because currently this being too smart causes the dreaded malleability
issues where people have been known to lose money.


## What about SegWit?

SegWit actually solves only one of these items. It moves the signature out
of the transaction. SegWit doesn't fix any of the other problems in Bitcoin
transactions, it also doesn't change the version after making the
transaction's-meaning essentially unable to be understood by old clients.

Old clients will stop being able to check the SegWit type of transaction,
because the authors of SegWit made it so that SegWit transactions just have
a sticker of "All-Ok" on the car while moving the real data to the trailer,
knowing that the old clients will ignore the trailer.

SegWit wants to keep the data-structure of the transaction unchanged and it
tries to fix the data structure of the transaction.  This causes friction
as you can't do both at the same time, so there will be a non-ideal
situation and hacks are to be expected.

The problem, then, is that SegWit introduces more technical debt, a term
software developers use to say the system-design isn't done and needs
significant more work.  And the term 'debt' is accurate as over time
everyone that uses transactions will have to understand the defects to work
with this properly. Which is quite similar to paying interest.

Using a Soft fork means old clients will stop being able to validate
transactions, or even parses them fully. But these old clients are
themselves convinced they are doing full validation.

## Can we improve on that?

I want to suggest a way to **one-time** change the data-structure of the
transaction so it becomes much more future-proof and fix the issues it
gained over time as well. Including the malleability issue. It turns out
that this new data-structure makes all the other issues that SegWit fixes
quite trivial to fix.

I'm going to propose an upgrade I called;

> **Flexible Transactions**

Last weekend I wrote a little app (sources [here]
(http://zander.github.io/scaling/transactions))
that reads a transaction and then writes it out in a new format I've
designed for Bitcoin. Its based on ideas I've used for some time in other
projects as well, but this is the first open source version.

The basic idea is to change the transaction to be much more like modern
systems like JSON, HTML and XML. Its a 'tag' based format and has various
advantages over the closed binary-blob format.  
For instance if you add a new field, much like tags in HTML, your old
browser will just ignore that field making it backwards compatible and
friendly to future upgrades.

Further advantages;

* Solving the malleability problem becomes trivial.
* tag based systems allow you to skip writing of unused or default values.
* Since we are changing things anyway, we can default to use only var-int
  encoded data instead of having 3 different types in transactions.
* Adding a new tag later, (for instance ScriptVersion) is easy and doesn't
  require further changes to the transaction data structure. All old clients
  can still make sense of all the known data.
* The actual transaction turns out to be about 3% shorter average (calculated
  over 200K transactions)
* Where SegWit adds a huge amount of technical debt, my Flexible
  Transactions proposal instead amortizes a good chunk of technical debt.

An average **Flexible Transaction** will look like this;

<table>
<tr><td colspan=2>TxStart (Version)</td><td>0x04</td>
<td rowspan=5 class="vertical">TX-ID data</td></tr>
<tr><td rowspan=2 class=vertical>inputs</td><td>TX-ID I try to spent</td><td>1 
+ 32 bytes</td></tr>
<tr><td>Index in prev TX-ID</td><td>varint</td></tr>
<tr><td rowspan=2 class=vertical>outputs</td><td>TX-out Value (in 
Satoshis)</td><td>VarInt</td></tr>
<tr><td>TX-out script</td><td>bytearray</td></tr>
<tr><td>inputs</td><td>TX-in-script (Witness data)<td>bytearray</td>
    <td rowspan=2 class=vertical>WID-data</td></tr>
<tr><td colspan=2>TxEnd</td><td>0x2C</td></tr>
</table>

Notice how the not used tags are skipped. The `NLockTime` and the
`Sequence` were not used, so they are skipped in the transaction.

The Flexible Transaction proposal uses a list of tags. Like JSON; `"Name:"
"Value"`. Which makes the content very flexible and extensible. Just
instead of using text, Flexible Transactions use a binary format.

The biggest change here is that the `TX-in-script` (aka the witness data) is
moved to be at the end of the transaction. When a wallet generates this new
type of transaction they will append the witness data at the end but the
transaction ID is calculated by hashing the data that ends before the
witness data.

The witness data typically contains a public key as well as a signature.
In the Flexible Transactions proposal the signature is made by signing exactly
the same set of data as is being hashed to generate the TX-input. Thereby
solving the malleability issue. If someone would change the transaction, it
would invalidate the signature.

I took 187000 recent transactions and checked what this change would do to
the size of a transaction with my test app I linked to above.

* Transactions went from a average size of 1712 bytes to 1660 bytes and a
  median size of 333 to 318 bytes.
* Transactions can be pruned (removing of signatures) after they have been
  confirmed. Then the size goes down to an average of 450 bytes or a median
  of 101 bytes
* In contrary to SegWit new transactions get smaller for all clients with this
  upgrade.
* Transactions, and blocks, where signatures are removed can expect up to
  75% reduction in size.

## Broken OP_CHECKSIG scripting instruction

To actually fix the malleability issues at its source we need to fix this
instruction. But we can't change the original until we decide to make a
version 2 of the Script language.  
This change is not really a good trigger to do a version two, and it
would be madness to do that at the same time as we roll out a new format of
the transaction itself. (too many changes at the same time is bound to
cause issues)

This means that in order to make the Flexible Transaction proposal actually
work we need to use one of the NOP codes unused in Script right now and
make it do essentially the same as OP_CHECKSIG, but instead of using the
overly complicated manner of deciding what it will sign, we just define it
to sign exactly the same area of the transaction that we also use to create
the TX-ID. (see right most column in the above table)

This new opcode should be relatively easy to code and it becomes really
easy to clean up the scripting issues we introduce in a future version of
script.

## So, how does this compare to SegWit.

First of all, introducing a new version of a transaction doesn't mean we
stop supporting the current version. So all this is perfectly backwards
compatible because clients can just continue making old style transactions.
Naturally, with the problems that had, but nobody will end up stuck.

Using a tagged format for a transaction is a one time hard fork to upgrade
the protocol and allow many more changes to be made with much lower impact
on the system in the future.  There are parallels to SegWit, it strives for
the same goals, after-all. But where SegWit tries to adjust a static
memory-format by re-purposing existing fields, Flexible transactions presents
a coherent simple design that removes lots of conflicting concepts.

Most importantly, years after Flexible transactions has been introduced we
can continue to benefit from the tagged system to extend and fix issues we
find then we haven't thought of today. In the same, consistent, concepts.

We can fit more transactions in the same (block) space similarly to SegWit, 
the
signatures (witness part) can be pruned by full nodes without causing any
security implications in both solutions.  What SegWit doesn't do is
allowing unused features to not use space. So if a transaction doesn't use
NLockTime (which is near 100% of them) they will take space in SegWit but
not in this proposal. Expect your transactions to be smaller and thus lower
fee!

On size, SegWit proposes to gain 60% space. Which is by removing the
signatures minus the overhead introduced.  In my tests Flexible
transactions showed 75% gain.

SegWit also describes changes how data is stored in the block. It creates
an extra 'branch' in the merkle tree.  The Flexible Transactions proposal
is in essence solving the same problem as SegWit and the same solution for
blocks can be applied.  Which means we can have that merkle tree solution
as well. No change.


At the start of the blog I mentioned a list of advantages that the authors
of SegWit included.  It turns out that those advantages themselves are
completely not related to each other and they each have a very separate
solution to their individual problems. The tricky part is that due to the
requirement of old clients staying forwards-compatible they are forced to
push them all into the one 'fix'.

Lets go over them individually;


### Malleability Fixes

Using this new version of a transaction data-structure solves all forms of
known malleability.

### Linear scaling of sighash operations

This has been fixed in the BIP109 2MB hardfork quite some months ago.

### Signing of input values

This is included in this proposal.

### Increased security for multisig via pay-to-script-hash (P2SH)

The *Flexible transactions* proposal outlined in this document makes many
of the additional changes in SegWit really easy to add at a later time.
This change is one of them.

Bottom line, changing the security with a bigger hash in SegWit is only
included in SegWit because SegWit didn't solve the transaction versioning
problem making it trivial to do separately.  
With flexible transactions this change can now be done at any time in the
future with minimal impact.

### Script versioning

Notice that this *only* introduces the versioning byte. It doesn't actually
introduce a new version of script.  
This is an excellent example where tagged formats shine brighter than a
static memory format that SegWit uses because adding such a versioning tag
is much cleaner and much easier and less intrusive to do with
flexible transactions. Just add a new tag that defaults to version 1 so the
old transactions not having the tag stay consistent.

Imagine having to include "body background=white" in each and every html
page because it was not allowed to leave it out. Thats what SegWit does
right now. Even though it doesn't actually support changing it yet.

### Reducing UTXO growth

I suggest you read this 
[point](https://bitcoincore.org/en/2016/01/26/segwit-benefits/#reducing-utxo-growth)
for yourself, its rather interestingly technical and I'm sure many will not
fully grasp the idea.  The bottom line of that they are claiming the
UTXO database will avoid growing because SegWit doesn't allow more
customers to be served.

I don't even know how to respond to such a solution. Its throwing out the
baby with the bath water.

Database technology has matured immensely over the last 20 years, the
database is tiny in comparison to what free and open source databases can
do today. Granted, the UTXO database is slightly unfit for a normal SQL
database, but telling customers to go elsewhere has never worked out for
products in the long term.

### Compact fraud proofs

Again, not really included in SegWit, just started as a basis. The exact
same basis is suggested for flexible transactions, and as such this is
identical.

### What do we offer that SegWit doesn't offer?

* A transaction becomes extensible. Future modifications are cheap.
* A transaction gets smaller. Using less features also takes less space.
* We only use one instead of 3 types of encodings for integers.
* We remove technical debt and simplify implementations. SegWit does the
  opposite.

## Conclusions

SegWit has some good ideas and some needed fixes. Stealing all the good
ideas and improving on them can be done, but require a hard fork. This post
shows that the advantages are quite significant and certainly worth it.

We introduced a tagged data structure. Conceptually like JSON and XML in
that it is flexible, but the proposal is a compact and fast binary format.
Using the Flexible Transaction data format allows many future
innovations to be done cleanly in a consistent and, at a later stage, a
more backwards compatible manner than SegWit is able to do, even if given
much more time. We realize that separating the fundamental issues that
SegWit tries to fix all in one go, is possible and each becomes much lower
risk to Bitcoin as a system.

After SegWit has been in the design stage for a year and still we find
show-stopping issues, delaying the release, I would argue that dropping
the requirement of staying backwards compatible should be on the table.

The introduction of the *Flexible Transaction* upgrade has big benefits
because the transaction design becomes extensible.
A hardfork is done once to allow us to do soft upgrades in the future.

The Flexible transaction solution lowers the amount of changes required in
the entire ecosystem. Not just for full nodes. Especially considering that
many tools and wallets use shared libraries between them to actually create
and parse transactions.

The Flexible Transaction upgrade proposal should be considered by anyone
that cares about the protocol stability because its risk of failures
during or after upgrading is several magnitudes lower than SegWit is and
it removes technical debt that will allow us to innovate better into the
future.

Flexible transactions are smaller, giving significant savings after pruning
over SegWit.


Thanks