Crypto Forks: What Are They & How Do They Impact Cryptocurrency
Crypto Forks are not a novice phenomenon in the crypto space. The first Bitcoin fork happened on 1st August 2017, and ever since, there have been a large number of crypto forks. According to BitMEX Research, in 2018, Bitcoin alone saw 44 forks of its blockchain since its first hard fork in 2017.
In this post, we shall cover everything you need to know about crypto forks. Let's dig in and explore:
What are Crypto Forks?
To better understand crypto forks, you have to understand blockchain. Blockchain is the underlying technology behind cryptocurrencies.
It is a decentralised network that requires all participants in the network to agree on a standard set of rules to validate transactions. To validate a transaction, there needs to be a consensus.
Crypto forks occur when there is split in the consensus of participants in a particular network. This results in a single blockchain network splitting into two. To change the protocol of a blockchain, developers have to actively alter the code, a process that can have severe and permanent implications.
When a fork occurs, participants to the split Blockchain network have to choose which version of the network to work with.
There are generally two types of crypto forks, Hard Forks and Soft Forks.
Types of Crypto Forks
A hard fork is a permanent split of a single blockchain network, which results in two different versions of the blockchain. Hard forks happen when developers alter the underlying source code of blockchain to change or improve an existing protocol or create a new, independent protocol and blockchain.
There are three types of hard forks:
• Planned hard forks
Planned hard forks are usually well-received by the community in a particular Blockchain network. They are often already mapped out in a project's roadmap. When the time for the upgrade arrives, participants will voluntarily upgrade their software and leave the old version of the network.
• Controversial hard forks
Controversial hard forks, unlike planned hard forks, are usually not peaceful. They often occur due to internal disagreement within a community on solving a particular issue. As a result of the conflict, a portion of the community might decide to create a new chain, which results in two incompatible blockchains and two different cryptocurrencies. Both blockchains will have their community.
The best known controversial hard fork is the Bitcoin Cash one, which was created due to disagreements in the community. Bitcoin Cash came to be because one group believed that Bitcoin's scalability issue could be solved by increasing Bitcoin's block size from the default 1MB to 8MB.
• Spin-Off Coins
The open-source nature of cryptocurrencies makes it possible for anyone to alter certain digital coins codebases to create new coins with different characteristics. Anyone with a little expertise can create these spin-off coins.
By taking Bitcoin's underlying codes and changing one or a few things, a developer can create a totally new coin. An excellent example of a spin-off coin is the Litecoin, which was a fork of the original Bitcoin.
Soft Forks, unlike Hard Forks, involves optional upgrades. A soft fork occurs when a Blockchain's source code is updated, but nodes running the older version of the blockchain can still approve new blocks. This means the new forked chain will follow the new rule set but will also honour the old rules.
Just like hard forks, soft forks will involve two versions of the blockchain. The difference will be that in a soft fork, users who didn't upgrade will still be able to validate and verify transactions.
Compared to hard forks, soft forks are much easier to pull off as they do not require all of the nodes on a blockchain to sign on, just the majority. Soft forks can change the existing code. However, unlike hard forks, the end goal is to result in one blockchain, not two.
The Expected Results of Crypto Forks
One dominant blockchain:
Because a fork results in two blockchain networks, there is a high probability that one of the networks will get more attention and hype than the other. The network with the largest community and most participation becomes dominant.
Adoption of both Blockchains:
Sometimes, both blockchains that result from a fork operate independently of one another but enjoy roughly equal community adoption. In this case, there isn't a dominant blockchain to overshadow the other in the market.
Adoption of both blockchains, but one is favoured:
In this case, one of the blockchains becomes the dominant chain in terms of adoption and value.
Why do Crypto Forks Happen
There are several reasons why crypto forks happen. They include;
• A solution to technical disagreements
Bitcoin Cash is currently in existence because of prolonged disagreements on Bitcoin's scalability issues. It is because a group of leading developers, miners, and investors decided to increase the size of a bitcoin block, that another version of the protocol was forked.
• To add new features or functionality
Because most of the blockchain software is open-source, anyone can access GitHub, grab the code of a digital coin, and do some upgrades. If the upgrade is good enough and well-accepted by the coin's community, the upgrade can be added to the next version.
Effects of Crypto Forks on Cryptocurrencies
• Improve network speed
There are possibilities that a hard fork can improve a network's speed. Because a hard fork usually means a cryptocurrency splits into two, the process can result in miners' rewards reducing in value, which in turn can decrease block time. Decreased block time means faster network speeds.
• Two parallel coins are produced
Crypto forks tend to result in two parallel coins with different attributes. Some miners will support the new coin while others will stick to the old coin. The existence of two coins will split a community into two and increase competition in the crypto market. The improvements made in the new coin, if any, can improve scalability and massive adoption.
• Affect cryptocurrency prices
Crypto forks can affect cryptocurrency prices, either negatively or positively. The Constantinople upgrade, planned by Ethereum, is one incident where crypto forks can negatively affect cryptocurrencies prices. The failure of the planned hard fork had a negative impact on Ethereum.
The Litecoin hard fork is an example of how crypto forks can positively affect cryptocurrencies prices. Because of Litecoin's hard fork, which resulted in the creation of a new coin, the altcoin's price rose tremendously.
• Whales can manipulate the market
Whales are the big investors in the crypto markets. They are usually large organisations or individuals with deep pockets. Due to the massive amounts of money they have invested in digital currency, whales are generally looking for opportunities to increase their wealth.
Crypto forks offer whales an opportunity to increase their digital wealth without breaking a sweat. The investors usually increase their investments in a digital coin before the expected hard fork, which increases their investment wealth once the split is done. Their substantial investment in the coin helps them manipulate the price of the particular coin they invest in.
Crypto forks can also result in investors ditching the old version of a coin for the new version. This usually happens when the new coin shows more promise than the older coin, maybe because of the upgrades made on the network.
Crypto forks can negatively or positively affect cryptocurrencies. On the bright side, it can improve crypto networks with upgrades and new coins. On the downside, it can create a manipulative environment where affluent investors control the coin's prices. Either way, Crypto forks are here to stay. They offer room for improvement in a market that is in dire need of positive upgrades for scalability.
About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 31/08/2020