BIP 49 (Derivation Paths for Wrapped Segwit)

BIP 49 is the Bitcoin improvement proposal that defines the derivation path m/49'/0'/0' for wrapped segwit addresses, formally P2WPKH nested in P2SH. These addresses begin with the number 3 and were introduced in 2016 as a bridge format, letting wallets use segwit's fee savings while remaining spendable-to from older software that only recognized pay to script hash.

Why it matters

When segwit activated in August 2017, many exchanges and wallets could not yet send to the new bech32 address format. Wrapped segwit solved the chicken and egg problem: any wallet that could pay a 3 address, a format in use since 2012, could pay a wrapped segwit user, and that user still received most of segwit's benefits, including malleability protection and a meaningful discount on transaction weight. The dedicated derivation path mattered too, because keeping wrapped segwit keys in their own branch of the key tree prevented wallets from missing funds during recovery.

How it works

The address commits to a P2SH script whose redeem script is a segwit version 0 witness program. When spending, the redeem script is revealed and the signature data moves into the witness section, where it counts at a quarter of the weight of legacy signature data. The result is a typical input size of about 91 virtual bytes, compared with roughly 148 for legacy P2PKH, with native segwit under BIP 84 smaller still.