What Are Cryptocurrency Forks

What Are Cryptocurrency Forks?

October 6, 2018.
Learn about what cryptocurrency forks are and why these are necessary for the development of the cryptocurrency and blockchain community

With cryptocurrencies and blockchain coming into the spotlight, there has since been an influx of interest surrounding this emerging technology. However, despite its global adoption, there still remains a number of technical jargon related to cryptocurrencies that eludes the understanding of common people. One of these terms is cryptocurrency forks.

In the field of software development, forks are a common phenomenon. As the term suggests, a fork denotes any divergence, or a split, in a software protocol.

There are several reasons why a fork occurs, and in most cases, such a split is generally necessary. However, forks that occur in the blockchain community often stir a lot of controversy, and this is where most of the misconceptions about cryptocurrency forks arise.

Here, we’ll talk about what cryptocurrency forks are, the reasons why they happen, their different types, and their crucial role in the continuing development of the cryptocurrency and blockchain community.


What are cryptocurrency forks?

In order to have a clear understanding of cryptocurrency forks, it’s important to establish first how cryptocurrencies and its underlying technology, the blockchain, work.

Cryptocurrencies, or digital money, run on a decentralized peer-to-peer network. As there is no central authority to manage the network, there is a need for a system to verify, record, and secure transactions that occur. This is made possible by a distributed ledger called the blockchain and a process called consensus. On the blockchain, for a transaction to be verified and the information (“block”) added to the “chain,” the miners in the network should arrive at an agreement.

A fork occurs when there is a significant split in the consensus of users. This happens when different miners discover a block at the same time, which results in two split chains. This type of fork, however, is only temporary, as the chain that finds the next block first automatically becomes the “truth” and the shorter chain will be discredited by the network as “untrue.”

Permanent forks occur when there is a need to change the underlying rules governing the protocol. The reasons can be due to: (1) adding new features, creating security patches, or updating the code to enhance the network’s functionalities, or (2) altering a core rule, such as increasing the block size. This requires developers to actively change the fundamental code. Basically, a fork in these cases simply connotes a software or a protocol update.

There are also other reasons why permanent forks occur, such as solving a technical disagreement in the network (e.g., the Bitcoin and Bitcoin Cash fork due to the disagreement on Bitcoin’s scalability) and reversing transactions (e.g., the Ethereum and Ethereum Classic fork as a result of The DAO hack).


What are the different types of permanent forks?

In the context of cryptocurrency forks, these are permanent forks brought about by a change in the protocol. These permanent forks are classified into two categories:

1. Soft Forks
A soft fork refers to a software update that is backwards compatible with older versions of the protocol. This means that the newly forked chain will follow the new rules of the upgraded software, and will still honor and work with the rules of the previous software version. This also means that participants who did not upgrade will still be able to participate in the consensus process; however, the functionality of the non-upgraded software will be limited.

A few examples of soft forks include the BIP 66 (Bitcoin’s signature validation) and P2SH (enabled multi-signature addresses in Bitcoin’s network).

2. Hard Forks
A hard fork refers to a software upgrade that isn’t backwards compatible with older versions of the protocol. This results in a permanent divergence of the blockchain: one chain is governed by the rules of the upgraded version while the other chain continues with the old rules.

In this case, all participants are required to upgrade to the new software in order to continue participating in the consensus process; otherwise, those who do not do so will be separated from the new network and will stay with the previous one. It should be noted, however, that as long as support exists for the minority chain, the two chains will exist concurrently, such is in the case of Ethereum (ETH) and Ethereum Classic (ETC).

Hard forks can either be planned or contentious. Planned hard forks, as the term suggests, are those that are part of the project’s roadmap and are essential to the development process. In this case, the entire network adapts the new fork and the old fork dies out.

Contentious hard forks are those that are surrounded by controversies, as they are brought about by disagreements in the community. With this type of hard fork, the two versions of the chain coexist. Some contentious hard forks, however, do not necessarily occur due to disputes within the network. As the source code for Bitcoin is open-source, some hard forks are deliberately put into order to create new coins that are a variation of Bitcoin. Some examples of Bitcoin variants are Peercoin, Litecoin, and Dogecoin.


Why are cryptocurrency forks necessary?

Cryptocurrency forks—despite being seen in a negative light because of the discord it sometimes causes within the blockchain community—do still have its share of benefits. In a hard fork, the split in the chain entitles holders of the legacy chain to receive new free coins from the new chain.

The true beauty of forks in the blockchain community, however, goes beyond the issuance of free coins. Cryptocurrencies and the blockchain are relatively new concepts compared with other more established technologies; therefore, it’s a continually developing technology. Forks are the community’s way of introducing innovations to the technology and ensuring that everyone has a say in the development of the network. Forks, basically, is the embodiment of decentralization—the very essence of why cryptocurrencies and blockchain came to be.


In conclusion

Cryptocurrency forks, particularly hard forks, despite the many controversies surrounding them, are not necessarily a bad thing. Forks pave the way for changes in blockchain—both good and bad—that, in the long run, greatly contributes to the continuing innovation and development of this emerging technology.


– Article written by Tinny

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Categories: Blockchain, Cryptocurrency