Cryptocurrency forks are an important yet often misunderstood concept in the world of digital assets and blockchain technology. In simple terms, a fork refers to a change in the underlying protocol of a cryptocurrency that results in a split into two separate versions of the coin.
But what exactly does it mean when a cryptocurrency fork takes place and why are they significant? This guide will provide a beginner-friendly explanation of forks, the different types, their impact, and some notable examples.
Key Takeaways – What Does a Cryptocurrency Fork Mean?
Cryptocurrency forks represent pivotal moments in the evolution of blockchain projects. Some key points:
- A fork occurs when a blockchain diverges into two potential paths forward due to changes in protocol rules.
- Soft forks are backwards-compatible. Hard forks create entirely new cryptocurrencies.
- Planned, intentional forks aim to upgrade or enhance the network. Accidental forks are unintentional.
- Forks happen due to technical changes, disputes over upgrades, major bugs, or competing community visions.
- Forks impact blockchain immutability, monetary policy, mining power distribution, and community divisions.
- Significant, contentious forks can destabilize confidence but amicable forks promote innovation.
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A Basic Introduction to Blockchain Forks
First, let’s start with a quick overview of blockchains. A blockchain is a decentralized digital ledger that records transactions across a peer-to-peer network. Bitcoin was the first successful implementation of blockchain technology.
To function properly, there needs to be a consensus amongst all participants in the network regarding the valid state of the ledger at any given point in time. This consensus is established by the rules governing things like transaction verification and blockchain updates.
These rules are defined by the blockchain’s protocol – the underlying code that determines how the network operates. Proposed changes to the protocol that could improve or upgrade the network are submitted as “proposals”.
When a significant change is made to the protocol, but not all users agree with the change, the single blockchain can “fork” into two separate versions:
- One that follows the original protocol
- One that follows the newly updated protocol
This is called a blockchain fork. It results in a branching or divergence from the original blockchain into two separate paths forward. Both blockchains share an identical history up until the point of the fork. But from that point on, they operate independently as separate projects with distinct tokens.
Different Types of Cryptocurrency Forks
There are several types of forks that can occur, with varying degrees of impact on the network:
A soft fork is a backwards-compatible upgrade to the blockchain protocol. Old nodes will still recognize new blocks as valid.
Soft forks only restrict or limit protocol rules. For example, introducing new rules that tighten up transaction verification.
Since soft forks are backwards-compatible, miners and nodes can choose to upgrade at their own pace. The whole network eventually transitions to the new rules.
Soft forks do not result in a blockchain split or new cryptocurrency.
A hard fork is a non-backwards-compatible upgrade that effectively creates a permanent split between old and new versions of the blockchain.
Old nodes will not accept the new blocks added after the fork under the new protocol rules. So the blockchain diverges into two separate branches.
Hard forks can be intentional updates meant to improve the network. But they can also result from situations like bugs, security breaches, or community disagreements.
Nodes that upgrade to the new protocol will continue mining on the new chain. Nodes that don’t upgrade stick with the original chain. This leads to one blockchain splitting into two competing cryptocurrencies.
For example, Ethereum and Ethereum Classic both exist after a hard fork disagreement within the Ethereum community in 2016 following a major hack.
Planned Fork vs Accidental Fork
Planned, intentional forks are meant to smoothly upgrade or enhance the blockchain’s capabilities through community consensus. This includes both soft and hard forks.
Accidental forks occur unexpectedly, usually due to software bugs or protocol issues. They disrupt consensus and cause unintentional divergent blockchains.
Accidental hard forks can be difficult to recover from since significant reorganization of the separate chains is required to restore a single chain.
Why Do Cryptocurrency Forks Happen?
There are a variety of reasons both intentional forks and accidental forks occur:
- Protocol upgrades – Intentionally changing blockchain rules to add new features or fix bugs.
- Resolving disputes – Differences in community opinions about protocol changes.
- Adding functionality – Enhancing capabilities or performance through backwards-incompatible upgrades.
- Reversing transactions – Hard forks can reverse transactions in rare instances like hacks.
- Software bugs – Bugs that mistakenly cause consensus failures between nodes.
- Competing visions – Fundamental disagreements within the developer community.
- Taxation & regulation – Some forks aim to change protocols to avoid bans or compliance in certain regions.
Most forks are proposed and implemented by the core developers of a cryptocurrency. But anyone can announce a fork if they disagree with the status quo path of the project.
The reasons for forking often reflect issues and tensions within the community as alternate visions compete on how best to scale or evolve the technology.
Notable Cryptocurrency Forks
Here are some significant cryptocurrency forks from Bitcoin and beyond:
In 2017, Bitcoin experienced a contentious hard fork that resulted in the creation of Bitcoin Cash (BCH). The fork was driven by disagreements within the community over proposed protocol upgrades aimed at increasing Bitcoin’s block size to improve scalability.
This fork demonstrated the ability for substantial protocol changes to happen despite resistance, since anyone can freely fork Bitcoin’s open-source code.
Ethereum forked into Ethereum (ETH) and Ethereum Classic (ETC) after a major 2016 hack exploited a software vulnerability, resulting in $50 million worth of ETH being stolen.
The fork reversed the hack transactions, but some believed this went against the principle of blockchain immutability. They kept mining the original unaltered chain as Ethereum Classic.
Litecoin (LTC) forked from Bitcoin in 2011 with aims to improve speed and efficiency, adopting changes like faster block times and a higher coin supply limit.
Bitcoin Gold forked in 2017 to switch Bitcoin’s mining algorithm from SHA-256 to Equihash, designed to be ASIC-resistant and promote decentralized mining by individuals.
Privacy-focused Monero experienced an attempted hard fork to a new MoneroV coin in 2018. But it was poorly received as a misleading unofficial fork that was considered by many to be a scam.
This demonstrated not all forks have community support or intend to positively evolve the protocol.
The Impact of Cryptocurrency Forks
Forks can have significant technical, economic, and political impacts on cryptocurrency communities.
- Creates competing versions of the blockchain with a shared history but divergent futures.
- Splits the community between supporters of each path forward.
- Affects value of pre-fork coins and newly created forked coins.
- Alters hashing power and difficulty as miners shift between chains.
- Disrupts market stability until dominance is established between the forked chains.
- Creates monetary policy uncertainty if both chains persist.
- Allows experimentation with different technical solutions in parallel.
- Challenges status quo governance and power structures surrounding development.
The overall impact depends on the type of fork, level of community support, and if one chain becomes dominant over the other long term. Smoothly coordinated forks can benefit technology evolution. But contentious forks often reflect underlying political divisions that may destabilize confidence.
Forking enables cryptocurrency protocols to evolve in response to needs of users, developers, and miners. But it also carries trade-offs. Used constructively, forks allow valuable progress without compromising core principles of decentralization and transparency. Looking ahead, improvements around managing fork transitions can help users benefit from this flexible tool for much needed blockchain innovation.
Frequently Asked Questions
What is the difference between a soft fork and a hard fork?
Soft forks are backwards-compatible upgrades that only tighten protocol rules. Hard forks create entirely new and incompatible blockchains, effectively splitting the cryptocurrency into two.
What causes an accidental fork?
Accidental forks are usually caused by software bugs, protocol issues, or other technical problems that mistakenly lead to a blockchain divergence. They disrupt consensus between nodes.
Can a fork replace or eliminate the original cryptocurrency?
Not inherently, since forks split into two separate chains with a shared history. However, one forked cryptocurrency can gain dominance and community support over the other long-term.
Is a fork the same thing as a blockchain split?
Yes, a blockchain fork results in a split between divergent chains. One follows the old protocol rules, the other the new rules. They share history up to the point of fork.
Do people’s coin balances change after a fork?
Usually, balances remain the same on both chains after the fork point. But sometimes, a fork deliberately alters balances, like undoing transactions on one chain.
What happens when you own coins that undergo a fork?
You’ll own equivalent balances of the coins on both chains after the fork. Although the market value will diverge between the two cryptocurrencies over time.
Can a cryptocurrency fork more than once?
Yes, cryptocurrencies can experience multiple forks over time for various technical or political reasons, resulting in several forked chains with shared early histories.
Is it possible to “un-fork” back into a single chain?
Technically yes via deliberate network reorganization. But remerging forked chains is very difficult in practice and only happens if the community chooses to converge back to one chain.
Are forked coins completely separate cryptocurrencies?
After the fork point, yes – they operate as wholly independent blockchains with their own communities, technologies, and market valuations.
Does everyone in the community have to adopt a new fork?
No, individuals can keep transacting on the original chain or adopt the new one. However, consensus mechanisms ensure one chain usually becomes dominant long term.