In the world of blockchain technology and digital assets, cryptocurrency forks are one of the most common occurrences. A fork is an event in a blockchain where a particular cryptocurrency splits into two incompatible branches, giving birth to another digital currency.
Because of this process, several cryptocurrencies with names similar to Bitcoin appeared in the crypto sphere, including Bitcoin Gold and Bitcoin Cash. Ethereum had also given birth to Ethereum Classic, Ether Zero and Metropolis. However, it can happen in any crypto-technology platform not limited to Bitcoin and Ethereum alone.
While some forks are planned, others are the result of extreme circumstances. Whatever the case may be, once a fork takes place, there are major changes to expect. Learn how it can impact a crypto community here at Casino Days India!
Why does forking in cryptocurrency occur?
Forking occurs when there is a disagreement within a community on setting new rules or changing the protocol governing the network. They are seen as upgrades necessary to refine the system since blockchain technology continually evolves by the day.
It also happens when two or more miners find a block at the same time, which is extremely rare. As a result, the blockchain separates into two paths without colliding. Whichever chain becomes longer as blocks are added will be considered as the true blockchain, while the shorter chain will be abandoned by the network. This is called an accidental fork.
While most forks are temporary, some are permanent. Permanent forks are mainly used to include new functions in a blockchain, enhance the overall security and address the scalability issue within a network, among other things.
For instance, when a third-party application on the Ethereum blockchain was hacked in 2016, Ethereum implemented a fork. It reversed the effects of hacking, creating a new ledger that returned the stolen ethers to the users.
Types of forks
When it comes to forking in cryptocurrency, there are two main varieties you should know. This includes the following:
A hard fork is a radical change within a network’s protocol that creates two branches on the blockchain. One follows the new version while the other follows the previous protocol.
For the network participants who opt to follow the new version, they should upgrade their protocol software and stop processing blocks from the older one.
On the other hand, the users running the old software will experience an outdated version of the blockchain, such as seeing new transactions as invalid. Also, if there are not enough users following the latest version, a permanent split can take place.
Hard forks can also be divided into two sub-categories, namely:
Planned hard forks
A planned hard fork refers to a protocol upgrade that has already been planned by the creators or the developers from the start. Since there is a mutual agreement on how a certain coin will be forked, there will be no split in the blockchain.
Planned hard forks are implemented to improve the network’s capabilities and add new features. One example is the Monero cryptocurrency. In January 2017, Monero underwent a planned hard fork to include a feature called Ring Confidential Transactions (RTC). This allows the users to hide the amount of their transactions, as well as their identities.
Contentious hard forks
When there is a disagreement between the users of a certain cryptocurrency, a contentious hard fork occurs, splitting the community into two groups.
One of the examples of a contentious hard fork is the Bitcoin Cash that emerged in August 2017. It was initiated by users that wanted Bitcoin to improve its capacity by increasing the block size limit from 1MB to 8MB. The reason behind this hard fork was the issue of scalability, focusing on a faster processing time for transactions and lower fees.
However, the Bitcoin community was not able to find a middle ground, resulting in the creation of Bitcoin Cash.
Also called a soft-forking change, a soft fork is an upgraded protocol that is backwards compatible with older versions. Meaning to say, the network participants will still be able to participate in validating and verifying transactions without upgrading to the new software.
Unlike a hard fork, it is easier to implement a soft fork since it only requires a majority of nodes to upgrade the software. However, participants that do not upgrade to the new version may have reduced functionalities.
For example, a soft fork may enforce a new rule stating that the block size limit will be changed from 1MB to 800KB. Non-upgraded users will still see that the incoming new transactions are considered valid. But when they start to mine new blocks, the network will reject their actions.
The impact of forking in cryptocurrency
Forking in cryptocurrency can be beneficial, yet in some cases, it still poses some risks. Blockchains that undergo hard forks are considered to be dangerous. Once a split occurs in the network, it will become more susceptible to attacks and other issues. In fact, some networks that emerged because a hard fork suffered 51% attacks where the double-spending of coins occurs.
For example, the Bitcoin Gold blockchain suffered two 51% attacks in just six hours. Approximately USD$70,000 worth of Bitcoin Gold were double-spent in about four transactions.
Another vulnerability that cryptocurrency forks pose is replay attacks. This blockchain cyber-attack happens when a two-forked crypto allows transactions to be valid on both chains, especially if a hard fork fails to enforce a replay attack protection.
Forking in cryptocurrency also marks high volatility within the market and tension between crypto enthusiasts due to disagreements. It becomes an unstable time for a cryptocurrency’s value since there are no guarantees that a major upgrade is going to be a success.
Despite some challenges that come with the process, forking the blockchain allows cryptocurrencies to become more convenient for users, removing restrictions and updating protocols. They add new functionalities to an entire network, fix bugs and reverse transactions, helping to achieve the smooth functioning of digital assets.