Every blockchain has a unique protocol with a collection of algorithms that define it. Examples are the confirmation mechanism, block size, transaction speed, and protection technique. Engineers occasionally alter a cryptocurrency’s core code to enhance or correct issues. A “cryptocurrency fork” occurs when an asset with qualitatively different qualities emerges due to such adjustments.
What is a Cryptocurrency Fork
A fork is when an existing code establishes a new branch for a different project. Such a branch can evolve separately from the main one, and the project may include features that weren’t there in the first iteration. A fork is when a portion of one blockchain splits into another, copying the original code and altering it to produce a new one. For instance, Litecoin (LTC), a cryptocurrency, is a fork of Bitcoin (BTC) since its creators cloned the Bitcoin code, made certain modifications, and started a new project.
Brief History of Cryptocurrency Forks
As new hashing algorithms emerged in cryptocurrency, cryptocurrency forks initially arose. These techniques offer specific guidelines for block-level information encryption. The SHA-256 algorithm, historically the first hashing method created long before the emergence of cryptocurrencies, is Bitcoin’s foundation. Yet several other technologies are now being employed in the blockchain in addition to this one:
- SHA-256
- Scrypt
- Scrypt-Adaptive-Nfactor (Scrypt-N)
One hashing method gave way to another as the blockchain developed and got better. It led to the emergence of numerous digital coins with names and operating systems that were modified versions of Bitcoin. They didn’t start from scratch. Instead, they used the BTC computer code as a starting point. It is how the Litecoin cryptocurrency emerged, one of the first Bitcoin splits.
Types of Cryptocurrency Forks
The primary basis for categorizing forks is the number of changes made to the code. There are two types of forks.
Soft Fork vs. Hard Fork
Soft separation occurs when the nodes of the old and new versions may communicate with one another. A soft fork prevents the creation of a new currency. Hard, significant innovations split the chain into two halves that cannot communicate with one another. Hence, for instance, Ethereum Classic, Bitcoin Cash, and Bitcoin Gold all emerged.
Planned Forks vs. Contentious Forks
A hard fork is considered a planned fork when the community decides on a new route for the blockchain they are a part of. It indicates that everyone agrees to update the software, produce a new blockchain, and discard the existing blockchain. Ethereum had one of the most well-known planned hard splits. Byzantium was a hard-scheduled split in October 2017 to increase Ethereum’s scalability.
Contentious forks typically occur from conflicts within the community. They caused the blockchain to split, leading to the emergence of two distinct blockchains. In essence, the community divides in two and independently chooses to operate and mine on their preferred blockchains.
Reasons for Cryptocurrency Forks
There are various reasons for cryptocurrency forks. First, it is vital to understand that the code for the Bitcoin blockchain is open source, meaning anybody may examine and use it for free. Various protocol updates must be done when currencies develop and change. These modifications might be minor, like the inclusion of a new feature, or significant, like an increase in the maximum block size.
The prior and new versions are no longer compatible when developers make significant modifications to the project. If users decide not to upgrade, they may lose communication with network members who have migrated to the new version. This results in a fork, or the division of the blockchain into two branches.
Occasionally, various people in the mining industry may have differing opinions about updates to the blockchain. Others resist change, while others do. This network infrastructure separation may create new blockchains and new coins.
Implications of Cryptocurrency Forks
Due to the switchover to a new hashing algorithm, a fork is more than just a branching of blocks. Blockchain technology has undergone several improvements and modifications over the history of digital coins, and nearly every change has been followed by creating a new fork. One of the implications of cryptocurrency forks is that sometimes a fork results from the creators’ straightforward intent to publish a new coin. It frequently results from the rise of technological or financial conflicts. Necessary software modifications that necessitate the formation of a new blockchain to function give rise to cryptocurrency splits.
Impact on the Cryptocurrency Market
Both hard and soft forks frequently impact a digital coin’s value in the cryptocurrency market. The currency’s price could increase even before the split, for instance, if the community has reached a consensus and is awaiting an update. And if the project’s significant issues could be resolved in this way, it may result in a future increase in the value of its relatively large currency.
It’s also conceivable for the opposite outcome. Investors in the crypto market may need clarification about the cryptocurrency’s prospects, for instance, if a hard fork does not occur as planned or if the very thought of it causes a divide in the community. Its price might go down as a result.
Forked Cryptocurrencies and their Adoption
The adoption of forked cryptocurrencies developed because the original version of BTC wasn’t suited for specific uses. Yet nowadays, there are more commercial initiatives than ever before since using speculative instruments to do so is an easy method to make rapid money:
- The most well-known forked cryptocurrencies include SegWit, which improved the scalability of BTC and fixed issues with compliance.
- Ethereum Classic was developed in 2017 to cap the maximum token issuances.
- Dash coin, known initially as Xcoin and Darkcoin, was launched as a fork of Litecoin – a fork of the Bitcoin protocol.
LightCoin gained two crucial features: Replace-by-fee – enables users to swap out one transaction with one with a more significant commission. Child-pays-for-parent – Until a low-fee transaction is enabled, the feature prevents miners from authorizing a high-fee transaction.
How to Participate in a Cryptocurrency Fork
Cryptocurrency is often open source, meaning anybody may access and update it and participate in cryptocurrency forks. Any community member who knows how to alter the underlying code. In addition, anyone may start a soft fork or hard fork. To accomplish this, they only have to install the necessary software on the computer.
Nevertheless, transactions with changed settings will only enter the broader network if the validators accept this endeavor. It will be a single-user cryptocurrency, to put it simply. It won’t be worth anything. Similarly, any community member may easily submit a proposal for enhancing the project.
Legal Status of Cryptocurrency Forks
Regarding the legal status of cryptocurrency forks, forks are legal. Most countries view cryptocurrencies as a form of asset rather than a real currency, making them more comparable to stocks or rental properties. This viewpoint results in tax offices being only concerned when you “dispose” of an asset or acquire an asset in a specific situation.
Future of Cryptocurrency Forks
The future of cryptocurrency forks takes time to be determined. Forks, both positively and negatively, significantly impact the digital coin’s environment. They enable the development and advancement of cryptocurrencies but may also result in crises and disputes that exacerbate friction within the community. But many experts believe that forks will become more critical as more individuals with fresh objectives join the Bitcoin sector.
Risks and Challenges of Cryptocurrency Forks
There are several types of hard forks, which may benefit or harm society. Controversial hard forks can potentially split the community, but they can also symbolize creativity and variety in the cryptocurrency industry. Because cryptocurrencies are decentralized, users feel empowered because they may choose which coins to support based on their qualities.
It must be acknowledged that, notwithstanding any differences in viewpoint, some people may wish to promote chaos and instability. Although that appears sad, these variations show the abundance of innovation in the cryptocurrency industry.
Summing up, forks are divisions between chains of blocks in a distributed ledger that create a brand-new or updated blockchain. A fork frequently results in the making of a new cryptocurrency. Hard forks and soft forks are the two primary forms of forks. Software updates or advancements in blockchain technology frequently result in forks. Litecoin, Bitcoin Cash, Ethereum, and other well-known cryptocurrencies that emerged due to the fork stand out among the most popular ones.
