Cryptocurrency forks split the coin into two pieces. As a result, it creates new cryptocurrencies like Bitcoin Cash. Moreover, a backward-compatible fork will allow using previous protocols in a new forked digital coin. On the other hand, there are incompatible cryptocurrency forks as well. If you are a cryptocurrency investor or trader, you should know about the cryptocurrency forks as it is the core concept of how a cryptocurrency forms.
20 March, 2020 | AtoZ Markets – In the beginning, there was Bitcoin as only one cryptocurrency. It was created as a decentralized digital currency. Over time, Bitcoin splits up into Bitcoin and Bitcoin cash after having a hard fork. The first hard fork that split the bitcoin on 1st August 2017 and created the new cryptocurrency named as the Bitcoin Cash. Furthermore, Bitcoin SV and Bitcoin Gold came into existence.
There were numerous hard forks that happened in the past, for example, Ethereum hard fork and Litecoin hard fork. These new cryptocurrencies didn’t just appear from nowhere. Many came about as a result of a fork.
Hard forks occur when the user base or developers decide that something fundamental about a cryptocurrency needs to change. This could be due to major hacks, as the case with Ethereum as a fundamental disagreement within the community, like we’ve seen with Bitcoin and Bitcoin Cash.
Let’s start with the basic concept of the cryptocurrency forks.
What is Cryptocurrency Forks?
‘Fork’ or ‘Forking’ means a kind of software upgrade. It happens in such a way that it might be backward-compatible or might not be backward-compatible.
In short form, ‘Fork’ is a fancy name of a software or protocol update.
Cryptocurrency Forks may happen accidentally. If two miners discover a block at the same time, some nodes within the blockchain system register resulting in two chains. The fork is quickly identifiable as it is created from the split in the discovery of block. Therefore, they do not have any destabilizing influence within the network.
However, there is a purpose behind the major cryptocurrency forks. It occurs when developers intentionally add new features by modifying codes, fixing vulnerabilities or by changing the fundamental rules. Usually, the code of fork is similar to the original. However, it contains substantial modifications, which are permanent. Moreover, it requires network users to upgrade their software to the newest version. Sometimes forks may create a new protocol, new digital asset, or even new community.
Cryptocurrency forks may happen in various ways. Although, regardless of their nature, there is some common protocol that shares the transaction history before the split.
We can distinguish the cryptocurrency fork in 2 different ways:
- Hard Fork
- Soft Fork
Why Does a Fork Happen?
Cryptocurrency Forks may happen due to several reasons. However, the main reason is the split of communities or new feature implementations.
However, the maximum time it happens due to the split of a community.
Therefore, a hard fork is a split or divergence where the community decides to disobey the rules of the old protocol within the same blockchain. Hence, they often change rules and make a new blockchain. That is why a new version of the original blockchain creates from a specific block.
Moreover, this is why Bitcoin underwent a hard fork due to a group of users, miners, and developers wanting bigger blocks in Bitcoin blockchain. Therefore, they forked the Bitcoin into a new version and named it as “Bitcoin Cash” on 1 August 2017.
What is Hard Fork in Cryptocurrency?
In the cryptocurrency, any change in protocol or software upgrade makes old rules obsolete. Therefore, it uses the new code base, which is named as a hard fork. The hard fork is permanent, and it requires all nodes and users to upgrade to the latest version of the protocol software or wallets. This hard fork is not backward-compatible.
For example, you may want to open an MS Word 2015 file in MS Word 2019 software without the compatibility pack. You will not be able to do it as it is not backward-compatible that way.
Similarly, when a hard-forked Ethereum or Bitcoin becomes obsolete with old rules and a new version of the blockchain evolves from that spot.
A hard fork may happen to incorporate a new feature or change of core rules like block size or proof-of-work function. The main features of cryptocurrency hard fork are mentioned below:
- A hard fork changes the software protocol that makes older versions incompatible. Therefore, newly generated blocks do not support old ones.
- A hard fork is essential to modify important parameters or loosen the rules of block validation.
- Bitcoin protocol itself has not gone through a non-contentious hard fork yet. However, it has gone through many contentious hard forks like Bitcoin Cash, etc.
- Hard forks can be planned or controversial.
- Cryptocurrency hard forks are potentially chaotic and overwhelmed by the double-spending problem. Users can spend coins in a new block and can spend again in an old block as merchants and users with the old version of the software.
What is Soft Fork in Cryptocurrency?
A soft fork diverges from a hard fork as all the new rules do not make old rules. This type of fork may happen without a universal update of nodes and software to recognize the change. However, this type of fork needs most miners to remain up to date to enforce the soft change.
For example, you may want to open an MS Word 2003 file in MS Word 2019 software. You can do it because it is backward-compatible.
You may have heard the name of SegWit. It is a similar cryptocurrency soft fork, which was a long-awaited Bitcoin scaling solution. It was through a soft fork of Bitcoin’s protocol that it was activated on August 24, 2017. Some other features of the cryptocurrency soft fork are mentioned below
- The soft fork is a software upgrade that can work with older versions. It is backward compatible. Therefore, users who failed to upgrade their software to the latest version won’t be cut off from the original network.
- A soft fork may create from changes that tighten the rules of block validation or by implementing additional functionality without affecting the original network structure.
- A soft fork is possible when a majority of users agree to upgrade to the new version to enable new rules within the blockchain network.
- The soft fork does not carry double-spend risks. Therefore, they are mostly dull events that can go without notice by the crypto investment community.
After the above discussion, we can come into conclusion with the below-mentioned summary:
- A fork divides a blockchain in two. It may happen either accidentally or by splitting of consensus. Moreover, it may happen as a result of intentional modifications of the software protocol.
- All cryptocurrency forks can be either soft or hard. In both cases, the result is the new chain with similar identical features, which co-exists with the previous version.
- Soft forks are usually minor software updates that are partially compatible with older versions. Users may work within the network without upgrading, though eventually, both chains will merge together as it will not absorb the shorter one. Therefore, soft forks are safer for investors.
- Structural modifications may create hard forks to affect the fundamental rules of system operation. The new and old chains might not be compatible. Therefore, results might create two of everything like two autonomous chains, two ledgers, or even two coins. Hard forks are potentially chaotic as they are often overwhelmed with the issue of double-spending. Users cannot handle these with care as negligence may cost money.
- Moreover, hard forks are risky events. However, they offer many chances to earn money by getting free coins, speculating the price movement before and after the fork, and betting the price of a new coin.
- Investors with forked coins can transfer to their private wallets before the fork. Moreover, they can hold off from transactions during and after the split.
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