If you’re one of the many crypto enthusiasts, you may have heard of the term crypto forking — and you’re probably wondering what it means. To answer this question, we need to go back to the very beginnings of blockchain technology and cryptocurrencies.
The idea of digital currency dates back to the 1980s. In 1991, the first papers on blockchain technology were published. Based on these papers, in 2009, we witnessed the birth of Bitcoin (BTC) — the world’s first cryptocurrency — and thus also the birth of the DeFi (Decentralized Finance) community.
When Bitcoin (BTC) was launched, the DeFi community looked for a way to scale this new and revolutionary blockchain technology for something more than simply for digital currencies that would allow you to buy pizza online. This article describes how this endeavor resulted in forking crypto, so read on to find out more about it.
Understanding Blockchain Technology
We can describe the blockchain as a database — a set of data in an array of blocks stored on a computer network, which operates based on a specific set of rules. Each blockchain network is secured by a different consensus mechanism.
The Bitcoin blockchain, as well as the blockchains of some other cryptocurrencies, have the consensus mechanism known as proof of work (PoW). Another popular consensus mechanism used by some altcoins is the proof of stake (PoS) algorithm. Compared to PoW, the PoS algorithm is more eco-friendly and deals with block information differently. There are also several other consensus mechanisms besides these two.
One of the major issues that every payment network processor has to solve is the problem of double-spending. Payment networks aim to prevent each one of their entities (accounts) from spending the same amount twice. This is usually done by a centralized server.
To prevent double-spending in decentralized networks (such as those of cryptocurrencies), every node in these networks has to have a full list of all transactions conducted through them and be able to confirm and validate every transaction. In the PoW consensus mechanism, transaction validators are known as miners. They confirm and validate a transaction and then add it to the blockchain. For this, they are rewarded with a monetary incentive in the form of crypto tokens.
What Are Cryptocurrency Forks?
When a cryptocurrency community wants to add new functionalities and new features to the crypto’s original blockchain, it needs to introduce new rules. This means changing the original code of the cryptocurrency, and this can sometimes even lead to creating an entirely new cryptocurrency out of the original. These changes are known as forks.
The general meaning of the term “fork” in computing is an updated or a new version of the original code. Cryptocurrency forks can be done in one of two ways, each representing a different procedure for developing the cryptocurrency’s blockchain. Developers can do crypto forks on BTC because Bitcoin is open-source, and the same also goes for the vast majority of other cryptocurrencies.
The two different forms of changes to the original blockchain protocol are categorized as two types of forks: soft forks and hard forks.
A soft fork is the process of creating a new and updated version of the blockchain which is backward compatible. This means that new rules are added to the old code without the need for the miners to change the way they “mine” (confirm and validate transactions), and thus no software updates or new mining software is needed.
The new rules in soft forks are mostly for adding additional security to the blockchain and maintaining it. All nodes can continue to mine the same way as before the soft fork was introduced without any issues. The best example of a BTC soft fork is SegWit. SegWit stands for Segregated Witness and is a function/process that allows Bitcoin block size to increase for up to 4MB.
The opposite of a soft fork, a hard fork is a rigid and radical change in the old protocol of the blockchain network. Most of the time, hard forks are a result of disagreements between the developers. If one group of developers is dissatisfied by the current path the cryptocurrency is taking, they can choose to go their way and create their own version of the protocol — that is, to hard fork the blockchain.
This permanent divergence results in creating a new cryptocurrency. With hard forks, the blockchain splits and if you had some amount of coins before the hard fork, you will also get the same amount of coins in the new cryptocurrency.
In the DeFi community, this practice is sometimes called “free coins”. However, the success of a hard fork really depends on how well the new cryptocurrency will be accepted.
Hard Fork Examples
The most well-known example of a hard fork is the creation of Bitcoin Cash (BCH) which split from Bitcoin. BCH was born in August 2017 as a result of a disagreement between BTC developers — they couldn’t agree on what the size of the Bitcoin block should be. One group wanted the block size to vary from 1MB to 2MB, whereas others wanted it to be able to reach 9,000MB. Both groups decided to go their own way when they finally realized that they couldn’t agree on this matter.
Bitcoin cash has a block size of 8MB and can process up to 61 transactions per second, compared to Bitcoin, which can process 3 to 7 transactions per second. Since Bitcoin’s creation, there have been tons of other Bitcoin hard forks, too. These include Bitcoin gold, Bitcoin diamond, Bitcoin X, Bitcoin 2X, and many more, some more successful than the others.
Something similar happened to Ethereum, as well. Ethereum was deployed in 2015 as a global open-source decentralized software platform that allows for adding new features and building and deploying applications on its blockchain network. Along with Ethereum, a decentralized autonomous organization (DAO) was created, which was supposed to fund new projects and grow the Ethereum network.
In 2016, the DAO got hacked, and the hacker managed to steal ~50 million dollars worth of Ethereum from it. After this incident, the Ethereum chain split. Two new coins emerged from the split — Ethereum Classic (ETC) and Ether (ETH).
A Few Words Before You Go…
Forking crypto means creating new or updated versions of the crypto’s open-source code. There are two types of crypto forks: soft forks and hard forks.
Soft forks are the mechanism that allows a given blockchain to continue to be maintained and developed and evolve and adapt to the requirements and needs of the DeFi community.
On the other hand, hard forks are made to create an entirely new crypto from the old one, typically as a result of disagreements between developers and their inability to solve a particular problem related to the cryptocurrency’s protocol. A hard fork can often be the best answer to resolve a conflict between two opposing sides, and a signal that they have decided to part ways and continue developing separate cryptocurrencies.
We hope this article can help you understand the basics of the history of cryptocurrencies, the blockchain technology that powers them, and the need for creating forks.