A fork in cryptocurrency refers to a significant change to a blockchain protocol. Forks may create an entirely new blockchain or a temporary divergence in the protocol. Join Crypto Daily as we delve into forks and explore some of the most notable forks that have occurred in the crypto space.
What is a Fork?
In the context of cryptocurrencies, forks refer to a significant change in the underlying protocol of a blockchain network. These changes can result in creating a new blockchain with different rules and features or may just cause a temporary divergence that is eventually reconciled. There are two types of forks: hard and soft forks. Forks are categorized depending on the level of compatibility between the old and new versions of a blockchain.
Types of Forks: Hard and Soft Fork
There are two main types of forks in the crypto world: hard and soft forks.
Hard Forks
A hard fork occurs when a substantial protocol change is made to a blockchain network that is not backwards-compatible. When a change is not backwards compatible, the nodes running the old version of the software will not recognize the new blocks created by nodes running the updated software. As a result of the incompatibility, a hard fork can create a new blockchain that is separate from the original one.
Hard forks can be planned or contentious events. Planned hard forks typically occur when scheduled upgrades that are agreed upon by the majority of the community take place. Contentious hard forks, on the other hand, happen when there is a disagreement within the blockchain community, leading to a split in the blockchain.
In the event of a hard fork, holders of the original cryptocurrency usually receive an equal amount of the new cryptocurrency on the latest blockchain as they held on the original blockchain.
(If you held 10 units of the original cryptocurrency before the fork, you would receive 10 units of the new cryptocurrency afterwards.)
Soft Forks
Unlike hard forks, soft forks are backwards-compatible upgrades to the blockchain protocol. In a soft fork, the new rules introduced to the protocol are compatible with the old rules, allowing nodes running the old software to recognize still and validate the new blocks.
Soft forks typically introduce new features or tighten existing rules in the blockchain without requiring all nodes to upgrade.
During a soft fork, only a majority of a network's hash power needs to adopt the new rules to succeed. The nature of soft forks means they are considerably less disruptive and less likely to result in a split in the blockchain.
Why Do Forks Occur?
There are many reasons why a fork may occur in a cryptocurrency network:
Protocol Upgrades
Forks are often used to implement protocol upgrades which introduce new features, improve scalability, enhance security, and fix bugs. These upgrades may help the network evolve and adapt to changing needs and technological advancements within the crypto sphere.
Community Expansion
Forks may also be initiated to create a new cryptocurrency that builds upon the existing network's codebase but aims to address specific needs or target a different user base. These forks allow developers to experiment with new ideas and innovations.
Disagreements and Divisions
Disagreements within the cryptocurrency community may lead to forks. Disagreements can relate to governance, economic policies, or project direction. If consensus within the community cannot be reached, a fork may occur, creating a new blockchain with a different set of rules and principles.
The Implications of Forks
Forks may lead to various implications for the cryptocurrency ecosystem, including:
Creation of New Cryptocurrencies
Hard forks may often result in the creation of new cryptocurrencies. In such an instance, the holders of the original cryptocurrency receive an equal amount of the newly created cryptocurrency, which can be traded or held separately. Hard forks can increase diversity in the cryptocurrency market and provide users with more options.
Community Fragmentation
Forks may cause community fragmentation, as different factions within the community may choose to support different versions of the blockchain. Fragmentation can result in a split in the user base, developer community, and mining power, potentially weakening the network's overall security and stability.
Market Volatility
Forks can cause market volatility driven by uncertainty and speculation surrounding the new cryptocurrency and its potential value. Traders and investors often react to forks by buying or selling the new or original crypto, resulting in price fluctuations.
Compromised Network Security
Network security may be temporarily compromised during a fork, especially in the event of a hard fork. Miners may switch between the old and new chains, decreasing hash power and making the network more vulnerable to attacks.
Notable Examples of Forks
There have been several notable forks in the cryptocurrency space:
- Bitcoin Cash (BCH): Bitcoin Cash (BCH) is a hard fork of Bitcoin (BTC) that occurred in August 2017. The fork addressed scalability issues by increasing the block size limit from 1MB to 8 MB. Bitcoin Cash (BCH) aims to provide faster and cheaper transactions than Bitcoin (BTC).
- Ethereum Classic (ETC): Ethereum Classic (ETC) was created after a contentious hard fork in the Ethereum network. The fork occurred in 2016 following a disagreement over handling a security breach that resulted in the theft of funds. Ethereum Classic (ETC) continued with the original blockchain, while Ethereum (ETH) followed the new blockchain.
- Monero (XMR): Monero (XRM) has undergone several hard forks to implement protocol upgrades and improve privacy features. These forks resulted in new cryptocurrencies, such as MoneroV (XVM) and Monero Original (XMO).
Final Thoughts
Forks play a significant role in the evolution and expansion of cryptocurrency networks. These changes may introduce new features, address disagreements, and create opportunities for innovation. While generally implemented to enhance a network, forks also come with challenges like community fragmentation and temporary network security risks.