What Is Transaction Malleability and Why Was It a Problem for Bitcoin?

Transaction malleability is the characteristic that allowed a third party to slightly modify the digital signature of an unconfirmed transaction, which would change its unique transaction identifier (TXID), without invalidating the transaction itself. This was a problem because systems relying on the original TXID, particularly those involving multi-step transactions like payment channels or exchange withdrawals, could fail.

For example, if a child transaction referenced a parent transaction by its original TXID, the malleated TXID would break the link, causing the child transaction to be rejected.