Occasionally, cryptocurrency users experience wide fluctuations in the price of coins. This phenomenon is termed as a fork. Let us have a look at the main causes of a fork and occurrence of its event.
Cryptocurrency is a digital currency generated using a computer. It employs a decentralized payment network. The peer-to-peer technology indeed eliminates much of the confusion related to centralized banking.
Cryptocurrency coins are encrypted versions of the public ledger “blockchain”. Coins will flourish only when the code of a specific coin is upgraded and altered. These constant changes regulate the compatibility of new coins with the older ones.
What is a Project Fork?
A Fork refers to the event of an individual project deviating from a specified software project. Forks sometimes occur in the open source sphere, within a project's community, leading to a split within the community and result in two distinct projects thereafter.
There are two types of forks: Soft forks and hard forks.
Softfork and Hardfork in Bitcoin terminology
The terms softfork and hardfork describe breaking changes within the protocol of a Bitcoin:
If a cryptocurrency network experiences a softwork, a new set of rules is implemented in the most recent release. All nodes of miners (or witnesses) running the latest version add one or more "words" (i.e. rules) to their "alphabet" (i.e. the current set of rules). Softforks have the following properties:
- They are forward-compatible. That means that nodes running an older version of the software will accept blocks created by new nodes.
- After a softfork, only miners have to update their software. Normal users can keep running older nodes, which will accept the newer blocks. However, users wanting to use new rules which haven't been implemented before would still have to shift to the new version.
In order for a softfork to be successful minimum 51% of the mining power has to shift to the new version. Once that happens, transactions from older clients incompatible with the new set of rules will simply be ignored by the network and become invalid.
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Hard forks are not forward-compatible. The nodes running follows the old consensus rules and doesn't consider the new rules. This results in a permanent divergence in the block chain.
If a cryptocurrency network experiences a hardfork, a new set of rules is implemented in the most recent release. All nodes of miners (or witnesses) running the latest version add one or more "words" (i.e. rules) to their "alphabet" (i.e. the current set of rules). Hardforks have the following properties:
- They are not forwards-compatible. That means that nodes running an older version of the software will not accept blocks created by new nodes.
- After a hardfork, every single user (normal users and miners alike) has to use the new software version. If someone decides not to do that, he or she will be excluded from the network.
Not all hard forks are born equal.
Anybody who owned coins at the time of hard fork, will have authority on these coins on both the blockchains. Initially, during the hard fork, the value of the coins diminishes. But, after the split, the value of each set of coins reflects both the mining and community support.
Why are forks bad?
Forks turn painful to companies who depend on a specific type of coin.
A hard fork undermines the entire project, which is why the majority of the community opposes it strongly.
Business transactions are lost during a fork.
Results in a tremendous amount of work within a coin’s community as all the existing software must be updated to the latest version to prevent the loss of coin.
Regular software updates and extra work results in businesses shift towards the more stable coin type.
The least popular coin is less valuable.
Just say, a fork is not fixed, this cause an incompatibility and results in two distinct versions of the coin.
In the incredibly competitive market of cryptocurrency, the community is least interested in tolerating this.
Currently, there is a lot of talk in the cryptocurrency scene going on about hardforks and softforks. There is a chance Bitcoin might soon experience either a hardfork or a softfork. Etherium experienced a hardfork last year and a planned Steemit hardfork recently failed due to the fact that the witnesses didn't reach consensus.
BitCoin is resistant to Polemic Hard Fork
Example of Hard Fork in Real Time…
Ethereum experienced hard-fork multiple times. One of the primary Ethereum hard forks was an ad-hoc fork, hacked by exploiting a vulnerability in its code. Ethereum’s community was prone to an attack where a huge number of tokens were stolen from a DAO (a smart contract). Protocol owns no fault, but rather a badly coded contract.
Bitcoin hasn’t had one of these yet, whereas in the case of Ethereum it was pre-decided from the starting that the protocol would hard fork 3 times, introducing new features each time. These involve improvements to the protocol. People using Ethereum must make an upgrade of software a regular routine in order to stay on the main blockchain, and adapt the new improvements each time.
After the occurrence of the hard fork, people still want to remain on the original chain fearing the possibility that the community will dump their coins diminishing its value and making mining unprofitable.
An uncertain hard fork is difficult to predict. Even though there are certain indicators, yet its possibility comes as a surprise.
In reality, they are not the end of the world, rather exciting.
Finally, it can be said, often during a fork, the coin loses its value. If the fork is putting the coin’s survival at risk, this drop in value is warranted. Conversely, if it is improving the coin’s stability through code, it emerges out to be an excellent buying opportunity.