By Josiah Wilmoth
Cryptocurrency forks have a tremendous impact on the trajectory of crypto finance investments, but many investors without computer development experience struggle to understand the technical jargon. This is why Strategic Coin has set out to provide sophisticated investors with the educational resources and research they need to take advantage of market opportunities as they arise.
Below, this article explains what forks are and what role they play in cryptocurrency and blockchain development:
The Definition of a “Fork”
In software development, it is common for a developer to make a copy of a project’s source code and begin independent development. This is known as a fork. Forks occur for several reasons within the cryptocurrency ecosystem. Occasionally, they stem from disagreements within a community about the future of the project and result in permanent network splits. However, forks are also a component of regular software upgrade and development.
Soft Fork vs. Hard Fork
Following a fork, different versions of the software may or may not be compatible. If the fork is compatible with older versions of the software, it is considered a “soft fork”. Because they maximize user compatibility, most cryptocurrency developers try to deploy protocol upgrades via soft forks whenever possible.
If the new version of the software is no longer compatible with older versions, the upgrade is considered a “hard fork”. This means that people using different software versions will not be able to transact with one another, as the original blockchain has essentially split into two different networks.
Notable Hard Forks
Most altcoins are technically hard forks of Bitcoin since they are based on the Bitcoin codebase but are not compatible with the Bitcoin network. However, there have been several notable occasions when a hard fork has been the result of a split within the community and has resulted in multiple cryptocurrencies with a shared blockchain history.
Both Bitcoin and Ethereum have successfully endured contentious blockchain splits. Ethereum’s occurred in July 2016, following the high-profile hack of The DAO, one of the first Ethereum-based projects to take advantage of the initial coin offering funding model and the smart contracts governance structure. During the attack, roughly $50 million in ether (Ethereum’s native currency) was stolen from The DAO. Ethereum holders voted on whether to institute a hard fork to return all ether taken from the DAO. The vast majority of voters agreed with the hard fork, but a sizeable minority protested that this was a dangerous precedent and that blockchains should never be altered.
These hard fork opponents refused to upgrade to the new version of the Ethereum software following its release, creating two blockchains with a nearly-identical history. In this case, the forked blockchain retained the Ethereum name and branding, while those who refused to migrate to the new software renamed their platform Ethereum Classic and have operated independently of the main Ethereum network ever since.
Bitcoin’s most prominent hard fork occurred in August 2017, when a group of developers initiated a hard fork of the Bitcoin blockchain, creating a new coin called Bitcoin Cash. This blockchain split stemmed from ideological differences about the nature of Bitcoin, as well as how best to scale the network to accept a larger number of users.
Many Bitcoin developers and users believe Bitcoin should evolve into a settlement layer, while Bitcoin Cash proponents believe it should prioritize decentralized, peer-to-peer transactions above all else. After the majority of the Bitcoin community demonstrated support for Segregated Witness (SegWit), a software upgrade that lays the foundation for settlement layer applications, the minority group split away from the main network, forming the Bitcoin Cash currency and blockchain.
As with Ethereum’s blockchain split, Bitcoin Cash shared a transaction history with Bitcoin, so users who owned Bitcoins at the time of the blockchain received an equal amount of Bitcoin Cash. That said, the blockchains remain independent and users cannot send coins from one network to the other.
Strategic Coin is your go-to source for cryptocurrency investment research and education. Whether you need help understanding the basics of blockchain technology or desire to read an in-depth analysis of the latest initial coin offering, Strategic Coin will provide you with the information you need to understand the crypto finance industry.