What is a Fork in Cryptocurrency?
If you’re worried about a fork in cryptocurrency, be sure to read up on what it means with our guide below.
Looking to learn more about the basics of Crypto? Check out our Crypto terms every investor should know.
What is a Fork in CryptoCurrency?
If there’s a fork in cryptocurrency, it refers to the fact that there is a divergence in the blockchain. The blockchain will end up splitting into two, creating separate branches. This fork can either be a temporary occurrence, or it can be a permanent one.
The Types of Forks:
A soft fork occurs when the software a blockchain uses is updated, and thus a new branch is created using this updated software.
However, the original branch will continue to use the old system of software and make it backward compatible.
A soft fork does not require all users (such as miners) to upgrade their nodes, only a certain few will have to, and both chains can be used regardless.
In comparison, a hard fork is a bit more serious. This is a fork that is not backward compatible and is a permanent division from the old software.
If a node that is updated comes into contact with transactions that use the old software, this transaction will be seen as invalid. Every miner will need to upgrade their software to have access to new transactions that are considered valid.
However, with a hard fork, votes can be held. If enough users want to continue using the old software, the chain will split.
However, since these are just basic introductions to the cryptocurrency fork concept, let’s now go more in-depth on how the process works.
Why do cryptocurrency forks occur? What are the benefits and drawbacks of forking a cryptocurrency?
And what were some of the most controversial cryptocurrency forks?
Want to know more about forks in the crypto world? Open up an online bank account, deposit your crypto, and start using your BlockCard as soon as your application is complete.
Why Do Cryptocurrency Forks Occur in the First Place?
Before we talk about why cryptocurrencies fork, we have to briefly discuss the original operational philosophy behind the creation of Bitcoin. After all, Bitcoin and the concept of cryptocurrencies were created to give everyday people more power over their money and how they use it.
However, a currency or cryptocurrency never serves a sole purpose, and everyone has a different opinion on what constitutes “power.”
It is too easy to forget how severe the global economic collapse of 2008 was for the world. The fraudulent sales practices of banks and credit and mortgage lenders overextended the financial limits of an uneducated public.
The financial world as we know almost ended in 2008 because the powers that be who control our currencies, governments, central banks, and mints couldn’t effectively regulate the banking, credit, and mortgage industries.
And in the aftermath of the barely avoided global economic collapse of 2008, the concept of Bitcoin was created. Bitcoin was probably created by one person, or a group of people, under the pseudonym Satoshi Nakamoto. The first Bitcoin block was laid in January 2009.
The Bitcoin cryptocurrency is powered and maintained by a blockchain. A blockchain is a kind of public transparency ledger of transactions. Each block represents batches of verified data and transactions that are progressively added to the blockchain.
(And every cryptocurrency is not powered by a blockchain – some of them are powered by algorithms or proof of stake, for example. But we will use the blockchain example for the relative sake of simplicity.)
The critical thing to remember about blockchains is that they are decentralized. Even though the concept of the cryptocurrency may have been created by one or a team of developers, no central power controls it afterward.
And this fact can be a gift and a curse.
Most blockchains are powered by non-proprietary and open-source software programs that anyone can improve upon and add to. Almost all blockchains are maintained by volunteer node controllers and miners.
Hundreds of thousands of miners, node operators, cryptocurrency owners, and platform members connected to the cryptocurrency are required and necessary to maintain and perpetuate the transactional operation of the crypto.
OK, so what is the point of all this information?
It takes a community to maintain a cryptocurrency’s profile. Even the cryptocurrency developers cede control of its operational viability since it is a decentralized system.
The communities of people who buy cryptocurrencies and maintain their platforms have the ultimate power to vote to fork a cryptocurrency if they think the original purpose of the cryptocurrency is being forgotten or corrupted.
No cryptocurrency ever serves a single purpose. And everyone has a different definition of the word power.” So, when a cryptocurrency community votes to fork crypto, a new block must spring from and deviate from the path of the original blockchain.
Remember the first block, or “genesis block” of Bitcoin or any other blockchain-based cryptocurrency? That first block represents the initial operational philosophy and purpose of the cryptocurrency. And the first block in a cryptocurrency fork is a deviation of that original purpose.
What are some reasons that a blockchain community would vote to fork a cryptocurrency? Here are a few.
Convenience of Use
The launch of Bitcoin revolutionized the world of finance.
The traditional finance system of the world is still viable. Still, it is undeniable that blockchain technology will undoubtedly shape the future uses of currency, especially non-paper money, in the world.
Did you notice that we said “blockchain” and not “cryptocurrency?”
Since cryptocurrencies are still a long way from being reliably used as currency today due to market volatility. And a long-running joke when Bitcoin first appeared was that it was great for use as a currency until one tried to buy a slice of pizza with it.
While Bitcoin is revolutionary as the first cryptocurrency, it is not very convenient for use as a currency. Most people use Bitcoin for investment purposes or stores of financial value than for use as a currency.
Bitcoin transactions are notorious for being slow and taking hours to finalize. The main reason for this is the size of each Bitcoin block which is 1MB.
Incredibly, the Bitcoin genesis block and all the blocks created in 2009 and half of 2010 could accommodate over 36 megabytes of data. The official MB size was shrunk to 1 MB in July 2010. In 2010, this decision may have been done as myopic and preemptive protection against spam and security threats without a comprehensive consideration of long-term consequences.
(Still, it is important to remember that this was 2010, about seven or eight years before the cryptocurrency craze as we know it occurred.)
So, many advocates and blockchain community members of Bitcoin began debating amongst each other about the future direction Bitcoin should take. And since 2011, the original Bitcoin blockchain has undergone several soft and hard forks.
One of the first and largely forgotten Bitcoin forks occurred in October 2011. On that day, the Litecoin cryptocurrency forked from the Bitcoin blockchain.
Transactions are much faster on Litecoin than Bitcoin, and there is a larger supply of Litecoins on the market. However, Litecoin is not as popular as Bitcoin or the other thousands of cryptocurrencies that have appeared on the scene since 2011.
Sometimes a cryptocurrency forks because the community that maintains it demands upgraded security and technological advances.
Ethereum, currently the second most popular cryptocurrency globally, was launched in July 2015. Ethereum was billed as the next generation of cryptocurrencies and an inarguable improvement upon Bitcoin. The Ethereum platform, and its accompanying coin ETH, processed transactions much faster than Bitcoin. Bitcoin can process anywhere between one to seven transactions per second.
Ethereum can handle over 15 to 45 transactions per second.
And Ethereum even improved on the security measures in Bitcoin by creating the smart contract. But even Ethereum is not immune to security problems and cyber hacks.
In 2016, the Ethereum platform experienced a cyber hack that stole over $50 million in ETH from the platform.
It was an embarrassing hack that ignited a philosophical rift in the Ethereum community. Ethereum performed a hard fork later on that became the de facto main platform. The original platform was renamed Ethereum Classic.
Drawbacks of Cryptocurrency Forks
Soft and hard forks can be beneficial for improving upon the original vision of the cryptocurrency.
However, forks can create a situation where transaction viability and platform technology may not be compatible with community members who disapprove of the fork.
If you store cryptocurrencies on an online exchange before that coin’s accompanying blockchain forks, then the online exchange may freeze your access for two days before and after the division to protect their financial interests.
Hard and soft forks are neither good nor bad – they are now part of various options that cryptocurrency communities have to conceptualize the crypto they want on their own terms.