The financial market is a dynamic environment that goes through ups and downs in cycles. The…
Crypto fork. It sure sounds like a technological kind of utensil.
Cryptocurrency is very creative when using common terminologies to help explain their various mechanisms. In our previous blogs, we discussed airdrops, white paper, and sandwich attack.
Understand more about cryptocurrency forks through this blog post.
What Does Cryptocurrency Fork Mean?
A fork occurs when a participant or group implements changes to the protocols of a certain blockchain network. When a change happens, the original chain breaks away. This breakaway chain contains all the history and previous records of the original blockchain.
When the splitting happens, the branches become independent of each other.
Any kind of alteration within the blockchain can be considered as a fork. New token production often causes forking. It can be intentional or accidental.
Methods to Token Creations
There are two ways of making a new coin or token. First is from scratch. Developers copy and paste the pre-existing code.
Some parts are tweaked then introduced as a new token. Customizing it is important so that people can be encouraged to invest in it.
One example is Litecoin. It began as Bitcoin’s clone. Litecoin’s inventors made changes to the original Bitcoin code and now, it is very famous in the crypto space.
Kinds of Cryptocurrency Forks
Primarily, there are two types of fork: the accidental and intentional.
First, we all know that crypto mining is a competitive process. Everyone races to have a high mining rate. This traffic congests the network.
This mining congestion causes an accidental fork to occur. An accidental fork is the result of two or more miners mining the same block simultaneously.
An accidental fork becomes resolved when new blocks add up and the chain becomes longer. It provides more work for the network.
Developers use intentional forks to carry out new blockchain rules. Intentional forks help expand block size, minimize block time, or to even execute a wholly unique consensus mechanism.
Additionally, intentional forks have two sub-categories. A hard intentional fork or soft intentional fork.
Soft and Hard Crypto Forks
The two subdivisions of intentional forks are soft fork and hard fork. This is how the two forks work.
It is synonymous to a blockchain software protocol upgrade. If all the network participants want to adopt it, eventually it gets accepted as the new standard for a crypto coin or crypto token. Soft forks implement new features to both Bitcoin and Ethereum.
The new functions create a singular blockchain but these functions are backwards-compatible.
Transaction validations now fall on the enhanced version of the blockchain. The older nodes will still verify the new transactions coming from the upgraded blockchain. However, the enhanced blockchain won’t be able to accept the nodes that have not upgraded.
A hard fork is the result of major changes that happen in an older version of a blockchain. The new protocols can no longer work in consonance with the backward-compatible block versions. While soft fork is backward-compatible, hard-fork is forward-compatible.
It is the hard fork that causes the blockchain to separate into two: the previous blockchain and the new one. In the case of a hard fork, it not only adds new rules but requires the nodes to boost their software.
Most importantly, this is the origin of many new coins and tokens. Some popular examples are Bitcoin Cash and Bitcoin Gold. These two originated from Bitcoin blockchain’s hard fork.
Crypto Fork in Real life
First, we have bitcoin cash that evolved from Bitcoin’s hard fork in 2017. Gradually, the block size of Bitcoin Cash increased from 1 MB to 8 MB. Eventually, it reached 32 MB.
Second, another example is Ethereum Classic. Ethereum Classic happened when some developers did not accept the hard form in October 2016. They chose to retain the old Ethereum blockchain and called it Ethereum Classic.
Lastly, our third example relates to decentralized autonomous organization (DAO). A DAO hack occurred in 2017. 11,000 investors lost around $60 million worth of ETH. Ethereum’s trading value was less than $10 back then and 14% of its circulation coins was invested in the DAO.
This event caused an uproar within the Ethereum community. The resolution was to use a hard fork. It allowed the management to review all the activities before the hacks, store the stolen funds inside a smart contract, and facilitate withdrawals.
If you are interested in cryptocurrency fork investing, always review the fork’s history. It also helps to check which version is more popular and supported by people. Study the forks carefully because the circumstances on how it occurred has implications in its functions.
Cryptocurrency forks have three main purposes: improve functionality, resolve various security problems, and help bring together the community to preserve consensus and cooperation.
Nevertheless, forks can still impact the networks when conflicts arise, like what happened in Ethereum. But, it is a widely accepted part of the crypto space. Through forks, the blockchain improves and allows more functionality.
Cryptocurrency also continues its evolution through forking because it is one way of creating new and open source coins and tokens that can serve various purposes.