Thanks for the reply. But where are the input signatures "stored" and hashed, and how does that "free" space from the blocks to allow more transactions to fit in?
The more I try to learn the more questions I have.
The signatures are stored as part of the transaction. Because legacy nodes will not see the signatures, there is effectively more free space in the block for more data that those legacy nodes can see (e.g. more transactions).The more I try to learn the more questions I have.
What actually happened is that the block size limit was redefined to something called block weight. There is now a block weight limit, which is 4000000 weight units. Each byte of non-witness data (everything that a legacy node will see) is worth 4 weight units. Each byte of segwit data (everything that a legacy node won't see) is worth 1 weight unit. So if you use segwit, more bytes of your transaction will be in witness data than a comparable non-segwit transaction. So the weight of your transaction is lower and thus there will be more weight for other transactions in the block. That is where the capacity increase comes from.