Cryptocurrency Forks- Beyond just price vacillations and instabilities – indulging into causes and potential ramifications
Understanding the basics behind Cryptocurrency Forks?
With more than you can count, indulging in the working of these Cryptocurrencies has always been a task for most of us.
As we already know, these various cryptocurrencies (tokens and coins) also known as digital money are nothing but computer generated codes. However, undoubtedly the same can be easily explained as one of the best examples of ‘decentralization’.
Basically, the term ‘Cryptocurrency’ came into existence after acknowledging the fact that these coins or tokens are encrypted sections of public ledger universally known as blockchain. To add more to our list of facts, with the compulsion of sending address and a digital signature for considering any transaction authentic, anyone is allowed to add a new page to this public ledger if they have the right solution to the mathematical equation.
In short, just like any other computer program, one can make sure their specific coin flourish, with the assistance of regular upgrades and alterations. Conversely to make sure nothing goes erroneous, one must make sure they are very careful while corresponding the compatibility of older coins with the new ones.
- Splitting the Chain – as we know cryptocurrencies are based on blockchains which are nothing but blocks of data which endures on growing to form a chain of information. Thence Forking of Cryptocurrency in layman’s language is nothing but splitting the blocks of data they are based on and making it run in different directions with different rules.
What are the major causes of Cryptocurrency Forks?
As off now two different reasons have been listed for the same.
- Accidental Fork – coin compatibility can be listed as one of the main reason for this particular segment.
Usually, what happens is people using different versions of the software end up creating two different ledgers (one from the new version and one from the old). Once the same happens, it’s the coin developers who must rapidly eliminate the bugs and work on merging the different blockchain created in the process.
In case developers decide for the changes which result in incompatibilities between the older and the new version ‘hard fork’ is generated.
- Change in the Underlying Rules of the Protocol – be it changing the core rule like increasing the block size or adding a new feature to enhance the functionalities, fork which occur under this category are considered as permanent. Also, it is essential that all the users using coins must update all the application if they wish to the coin type correctly.
Forks occurring under above mention category can be separated into two different sections, which are soft-fork and hard-fork.
Major Types of Cryptocurrency Fork
- SOFT FORK – Elevated software which is well-suited with the older description
Much tranquil to work with, as only a minor community of partakers needs to upgrade.
While the functionality of non-upgraded participants is affected, this particular section allows participants with the older version of the software to participate in the validation and verification of the transactions.
- HARD FORK – Software upgrade isn’t suited with the older description
Results in a perpetual discrepancy of the blockchain.
It is obligatory for all partakers to upgrade to the fresher form, or else they won’t be able to contribute or endure to authenticate new transactions.
In case of minority chain, partakers can find the support, two chains will concurrently exist.
- Planned Hard Fork – in case a protocol advancement has been already quantified on project’s roadmap, the same can be listed under the section of the planned roadmap. Most of the time the same results in the death of old chain, as the entire community headed by the core developer’s team would transit to the new chain.
Few example of the planned hard fork – Ethereum’s Byzantium occurred in October 2017, Monero hard fork which occurred in January 2017.
- Contentious Hard Fork – usually created by a portion of the community with few major changes to the code (better version as per them) after facing a disagreement from the rest.
Few example of contentious hard fork
Bitcoin Hard Fork
Bitcoin cash – a portion of the community wanted to increase the size of the block from 1MB to 8MB, so that more transactions can be processed and fees paid by the user can be reduced, hence a hard fork resulted in Bitcoin cash.
July 20, 2017 – at block height 476768 – BIP 91 (also known as blockchain improvement proposal) was programmed to trigger at bock height 477120, which was intended to cast-off block formed by miners not supporting. However, certain community members sensed that accepting BIP 91 without aggregating the block size would not do justice to people who treat Bitcoin as an investment rather than just as a transactional currency.
Thence came the plan of the hard fork of Bitcoin, which was first announced by Bitmain. Basically, the goal of the cryptocurrency forks was to increase the number of transactions its ledger can process by increasing the block size.
Ethereum Hard Fork
Ethereum classic – hard fork of Ethereum which originated Ethereum classic was planned to reserve the effects of hack which occurred to the decentralized autonomous organization or simply DAO.
May 2016, The DAO ‘a venture capital fund’ raised $168 million with an intention of investing in projects using smart contract.
May 2016 an evidence was released with the particulars specifying security susceptibilities of The DAO and how ether could be stolen from them.
June 2016, 3.6 million (close of @50 million USD) were transferred to another account without owner consent.
July 2016, hard fork was decided to implement with the consent from the members of Ethereum community and The DAO to resolve the situation by removing ether taken in the exploit.
Ethereum classic came into existence, as few Ethereum community members rejected hard fork on the grounds of ‘immutability’.
Are Cryptocurrency Forks Good or Bad?
undoubtedly out of two existing Blockchain only one can achieve the status of correct, which means transactions recorded in the wrong blockchain might get lost. The best would be, people stay warned and avoided any transactions until the fork is resolved.
The potential loss of coins during the same might scare user or participant from using that particular Cryptocurrency.
Frequent upgrades and disturbance creates additional work and might allure user to switch towards a more stable coin.
Increase the factor of risk which might result in discarding or selling of the coins and tokens
One blockchain might become more dominant or can be favored, resulting in lower value and community adoption of the other
How difficult is to Fork a Cryptocurrency?
The answer would be a yes in theory, however, a no because of all the barriers in the path.
Basically, anyone can work on the development and make updates which are much needed in the software, by subsequently gripping Cryptocurrency code from GitHub. However, getting backing from adequate miners and users can never be considered as an easy task. Moreover getting the valuation as close as to the original is no child’s play as well.
Do you have more questions about Cryptocurrency Forks? Let us know below in comments, we will include them in our next knowledge base article.
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Disclaimer The views, opinions, positions or strategies expressed by the authors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of CoinGape. Do your market research before investing in cryptocurrencies. The author or publication does not hold any responsibility for your personal financial loss.