Occasionally, cryptocurrency users experience wide fluctuations in the price of coins. This phenomenon is termed a fork. Let us have a look at the main causes of a fork and the occurrence of its event.
Cryptocurrency is a digital currency generated using a computer. It employs a decentralized payment network. 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
- Hard forks
[Related blog: About Cryptocurrency]
Softfork and Hardfork in Bitcoin terminology
The terms soft fork and hard fork 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.
Subscribe to our youtube channel to get new updates..!
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 soft fork, 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 soft fork to be a successful minimum of 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.
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 blockchain.
If a cryptocurrency network experiences a hard fork, 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). Hard forks 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 hard fork, 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 the 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 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 hard forks and soft forks. There is a chance Bitcoin might soon experience either a hard fork or a soft fork.
Etherium experienced a hard fork last year and a planned Steemit hardfork recently failed due to the fact that the witnesses didn't reach a 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 to 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 their 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.