With the rise in the Cryptocurrency market, it is essential that both amateurs and pros take an interest in the various terms and trends related to it. One such interesting term that cryptocurrency investors must know about is “Fork” or “Forking”.
Fork or Forking in general terms is a fancy word for a kind of software update or a protocol update which can be backward-compatible or may also not be backward compatible.
When a cryptocurrency approaches this phenomenon, its price goes wild. These shifts in price can be positive or negative. If you pay attention and follow instructions, you can earn money during this phenomenon in the smartest way.
If you have worked in the crypto world long enough, you may have noticed such events. Some of the Forks which have previously caused the price of Bitcoin to go wild are:
- Bitcoin Cash Fork
- Bitcoin Gold Fork
- Bitcoin Diamond Fork
- Super Bitcoin Fork
There have been other Forks as well which have caused the prices of cryptocurrency to fluctuate. So generally, a Fork is when the cryptocurrency or code is updated.
Fork makes two blockchains run simultaneously on different parts of the network depending on the type of Fork while creating an alternate version of the blockchain.
There are two types of Forks in blockchain:
- Soft Fork which is backward compatible and is optional.
- Hard Fork which is non-backward compatible and is mandatory.
What Is Hard/Soft Fork?
A hard Fork is an update in the protocol or upgrades in software which makes old rules obsolete and uses the new code base as the main driving force.
A hard Fork is permanent. All the nodes and users must update to the latest version of the protocol software, so it is not backward-compatible.
This Fork is mandatory. If Bitcoin is hard Forked, then the old rules become obsolete while the new version of the blockchain will begin and is compulsory.
Bitcoin has not had a non-contentious hard Fork but has seen numerous contentious hard Forks. It can happen when a new feature is incorporated or can occur when the core rules like block size or change of proof-of-work function are changed.
A soft Fork is an update which is not back-compatible. Even though new rules are made, the old rules do not get obsolete. Unlike Hard Forks, the Soft Fork doesn’t need a universal update of nodes and software’s when old nodes sense the change.
However, Soft Fork needs miners to update in to impose the soft change. Segwit is a kind of a soft Fork which is a Bitcoin scaling solution. The Bitcoin’s protocol through soft Fork was activated on 24th August 2017. Software Fork is optional, unlike hard Fork.
What causes a Fork? Why are Forks bad?
There are two different events when a Fork can occur. When coin updates are not genuinely compatible it is called an accidental Fork. Separate ledgers are created by people using different versions of the software.
The two ledgers are from the new version and another from the old version. During these times, the coin developer will promptly eradicate the bugs which are causing the incompatibilities. The developer then decides how to merge the different blockchains.
When the developers of the coin decide to makes changes in the programming of the coin it creates a hard Fork where incompatibilities between the older and newer version are generated.
All the users of that coin must be willing to update all applications when the changes are made to continue using that coin type correctly.
We can also take an example of Microsoft to understand this phenomenon. Since Microsoft continuously releases new versions of Word, these versions try to be backward compatible.
They attempt to retain the ability to read and edit older documents, but many times the older versions of Word have trouble in reading documents created in one of the newer versions. We think that the document in both versions is the same, but there will be a Fork in your document.
Forks are considered to be huge trouble, but why?
Forks are known to cause huge inconveniencies within a cryptocurrency. Between two different blockchains, only a single one can be correct.
The coin transactions which are found on the “wrong” blockchain will be ultimately lost in many cases so during a Fork event investor, and miners will be warned not to make a transaction until it ends.
Companies which depend on that type of coin mainly face the most trouble during Fork. Many of the businesses using that cryptocurrency are chained since transactions may be lost during this event.
Since all the associated software must be upgraded to the latest version of the coin, so it is also an additional problem for the coin’s community.
Updates can prevent the loss of coin by Users, exchanges, miners, and others. A loss in the coin may drive users away from them, so it is essential to analyze the phenomenon carefully.
Many users, exchanges, and business will gradually switch to a stable coin if there are numerous updates in software. There will be a full incompatibility, and older and newer version of the coins will be differentiated if a Fork is not fixed.
The coin’s community will not tolerate this change in a competitive crypto market. A permanently Forked cryptocurrency is most likely to be worthless in no time due to the decrease in its value.
Thus it can be clearly said that a Fork can cause stress in the cryptocurrency community. This eventually increases the risk of holding that particular coin.
Holders of the currency may choose to sell their coins as quickly as they can. The value of the currency can drastically fall during an event of a Fork.
However, there might be cases when the Fork improves the stability of the coin in time to come through code improvements. The phenomenon of a Fork can however also turn out to be an incredible buying opportunity for smart people.