Wrapped SegWit

Wrapped SegWit, also called nested SegWit, packages a SegWit output inside a legacy pay-to-script-hash address beginning with 3, so wallets that predate the 2017 upgrade can send to it. It captures part of SegWit's fee savings, producing transactions roughly a quarter smaller than legacy equivalents, while native SegWit saves more.

Why it matters

Wrapped SegWit was the adoption bridge. In 2017 many exchanges and wallets could not yet parse the new bech32 address format, so sending to a native SegWit address would simply fail. Wrapping the witness program inside familiar P2SH meant every existing wallet could pay a SegWit user immediately, which let exchanges and services claim fee savings years before universal bech32 support arrived.

Today the compatibility rationale has largely expired. Native SegWit and Taproot addresses are supported almost everywhere, so wrapped SegWit persists mainly in older wallets, derivation paths under BIP 49, and balances that have not moved since.

How it works

The output looks like ordinary P2SH: it commits to a script hash. At spend time, the revealed script turns out to be a SegWit witness program, and the actual signatures live in the witness as usual. The extra wrapping layer costs some bytes, which is exactly why native SegWit, with no wrapper, is cheaper still.