In simple terms, when forks take place, they can easily change the course of events in a blockchain ecosystem.
Now, let’s look at what forks are, why they happen, and what they mean for the world of crypto. What Exactly Is a Fork in Cryptocurrency?
Forks, not the kitchen utensil no, in the realm of cryptocurrency, it means a division in the protocol of a blockchain.
This division results in two independent versions of the blockchain the former following one set of rules and the latter following a different set starting from a particular block onwards. The reasons for forks can be many, and they can come in many forms.
Soft Forks
A soft fork is a blockchain protocol update that is still compatible with the older version, meaning non-upgraded nodes can still validate transactions.
Mostly, soft forks tighten the rules, and usually, they are targeted to enhance security or add new features.
Hard Fork
Hard fork suggests a permanent improvement or split from the previous version of the blockchain. Nodes with older software reject newly created blocks by the new protocol.
The reverse is true. If the hard fork is forward-compatible, then a new blockchain has risen.
Reasons Behind Forks
There exist many reasons and of importances of why forks exist in the blockchain sense. We shall attempt to cover most of them below
- Protocol Upgrades
Upgrades to the protocol are mostly done through soft forks, which enhance resilience, scalability, or sets of features. For instance, Bitcoin’s Segregated Witness upgrade was implemented to lower transaction fees and increase throughput.
2. Community Disagreements:
Hard forks can take place in the event that stakeholders, developers, miners, and users have disagreements.
The 2017 Bitcoin Cash fork originated out of debates circling about the block size limits, that had proponents who favoured bigger blocks hence, the need for a total redo of the blockchain framework.
- Governance Issues.
Some forks can be a result of disagreements between governance figures, as in cases of funding or priorities in development. For instance, Ethereum’s hard fork to Ethereum Classic in 2016 was a result of the handling of a major hack.
- Community Experimentation
Some forks are designed for use as experiments where new ideas or improvements are tested. For example, the Constantinople upgrade of Ethereum in 2019 was meant to attain efficiency optimization and set a base for transition to proof-of-stake consensus.
Implications of Forking
- Creation of New Cryptocurrencies
Hard forks usually result in new cryptocurrencies. In this case, people holding specific initial coins receive equal amounts of the new currency. Although this will diversity the market, it nevertheless complicates the ecosystem.
- Market Volatility
Changes leading to forks can make the market volatile, resulting from traders’ reactions. Support from the community on the fork highly impacts the sentiment in the market.
3. Community Fragmentation
Forks may, in some cases result in community fragmentation and thereby weakening the overall consensus and cohesion of a project.
In light of this, community sentiment management and reaching consensus are very critical for projects predisposed to contentious potential forks.
Some of the Major Forks That Have Existed
- Bitcoin Cash BCH, Fork from Bitcoin BTC
In 2017, Bitcoin Cash forked from Bitcoin due to disagreements over block size limits. BC increased its transaction throughput by increasing block sizes from 1MB—Bitcoin—to 8MB.
- Ethereum ETH and Ethereum Classic ETC
Ethereum’s hard fork in 2016 occurred after the DAO hack that saw hackers snag Ether worth millions.
To recover from the hack, Ethereum rolled back its blockchain, and Ethereum Classic came as a safeguard against any future hacks.
In Conclusion
Therefore, forks are important events within blockchain networks and naturally show the decentralized nature of governance in cryptocurrency.
They can result in new currencies being created or be ideology driven, experimentations, or even upgrades and can influence markets while testing community consensus in the crypto space.
