What Is Forking Crypto?

In an age where advanced technology governs a more significant section of our lives, asset digitisation has become a must for a more efficient interchange of material items and information. As technology evolves, developers continue to provide new, updated versions of their digital products.

Satoshi Nakamoto, the anonymous cryptocurrency innovator, invented the groundbreaking blockchain technology that powers the world’s first cryptocurrency to promote a faster and safer online exchange of digitalized products without the need for centralized financial institutions. Soon after the debut of Bitcoin (BTC) in 2008, its underlying blockchain architecture opened the door for faster, cheaper, and safer digital asset trades

In certain instances, the underlying blockchain protocol, like any software, requires an upgrade, resulting in something called a fork. To understand the process of crypto forking, let’s first revisit the basics of blockchain technology.

What Is Blockchain Technology?

Blockchain is a distributed, unchangeable, and verifiable database that records every transaction and monitors the traded assets. Companies can use blockchain technology for all sorts of transfers,  regardless of whether the assets involved are tangible (money, precious metals) or intangible (trademarks, intellectual property). This will result in reducing the costs and risks of potential losses for all parties included in the transaction.

Bitcoin with crypto mining code on background

Furthermore, since data is at the heart of how businesses run, it is imperative that information is received as quickly and as precisely as possible. The blockchain is the ideal technology for safely storing and disseminating this data. It is a decentralised, immutable ledger to which only network members with specific permissions have access.

How Are Cryptocurrencies Created on a Blockchain?

Blockchain technology is built on open-source code publicly available to every IT developer who has a concept for a new digital product or service. The freedom to experiment with the blockchain’s open-source source code is one of the essential aspects of digital currencies since crypto developers can easily alter the software to meet the demands of their crypto project.

The creation of new cryptocurrency units relies heavily on the crypto mining process. When a crypto transaction is made, a crypto miner attempts to decode the block containing the encrypted transaction data. This procedure confirms the cryptocurrency transactions and generates new cryptocurrency units.

What Is Forking in Blockchain Terminology?

Forking cryptocurrency can be broadly described as the process of partitioning the blockchain that underpins a specific cryptocurrency network into two different modules or upgrading the existing one into a new version. As a result, there is a divergence in how the particular cryptocurrency performs on the blockchain. 

Bitcoin stabbed with fork

There are a variety of reasons why blockchain forks can occur, including fixing a significant security bug, improving the network’s functionality, or simply solving a disagreement among community members about how to proceed with the future development of the blockchain network.

How Do Crypto Forks Work?

As more and more crypto traders mine for cryptocurrencies, they generate a plethora of ideas for how the blockchain could be better utilised in the times to come. Consequently, the modification of a given digital program results in an updated version or even two divergent versions of the same blockchain that offer new features or products (such as a mainnet upgrade for improved scalability of transactions or a new token). 

Types of Forks

In accordance with the criteria and adjustments shortlisted by miners probing the fork on an existing blockchain network, the blockchain split of a cryptocurrency blockchain can either be planned (soft fork) as a regular upgrade by the developers, or it can appear to be an unplanned split (hard fork) of the blockchain protocol during its programming. 

The following are some of the characteristics of the aforementioned blockchain fork types.

Soft Fork

A soft fork happens when the software is upgraded to a version that can coexist with the prior version of the blockchain protocol, rather than a hard split of the set of rules governing the blockchain’s operation. A soft fork is a planned software upgrade of a blockchain that is agreed upon and implemented by the developers of a cryptocurrency project in order for the network to perform more efficiently.

With the soft fork, there is no actual split that creates a new blockchain. Rather than that, there is only a new, scheduled upgrade to the previously published version of the software. The new rules that govern the blockchain operations and functionality are followed by all network members and validators with full agreement. 

Bitcoin surrounded by forks

During a blockchain soft fork, old nodes will continue to verify the new blocks of encrypted transaction data as authentic to the network even after the forked update of the software has been activated. As a result, the old nodes can theoretically continue using the same ledger without upgrading the old software protocol.

The developers of a decentralised crypto project that are proposing the soft forks to the blockchain typically announce the planned split or add a fork schedule to their roadmap to let users know when the fork will be activated and when to expect the changes.

In addition, if the miners of the blockchain network are the ones probing the fork, the upgrade is regarded as a miner-activated soft fork (MASF). On the other hand, if the users themselves pursue the changes in the protocol, this modification is labelled as a user-activated soft fork (UASF).

Hard Fork

A hard fork in the blockchain protocol is a permanent divergence of the blockchain network. This split introduces software changes that are in conflict with the previous version of the program. A hard fork in the blockchain protocol occurs when there is no consensus among the blockchain community or developers on the new modifications to the blockchain’s functionality. Additionally, the hard split might occur as a result of the discovery of a programming error, i.e. a bug in the script.

The previous versions of the software will not recognize the new set of rules enforced by the hard fork. In order to validate the new blocks, everyone using the split blockchain will be forced to update to the new nodes. Consequently, the users that continue to use the older software version won’t have access to the network that follows the new hard fork protocol. 

A hard split in the blockchain, on the other hand, does not always imply that the old chain will entirely collapse. It simply means that when the hard fork is activated, two blockchains, i.e. two parallel networks will start to operate: one that uses the original blockchain with the old rules protocol and another that uses the updated system.

Which Are the Most Popular Cryptocurrency Forks?

Blockchain forking is one of the most common ways to make new cryptocurrencies. Instead of making new cryptocurrencies from scratch on a new blockchain network and then launching an ICO (initial coin offering) to raise money for the project, fintech developers often opt to make new tokens by forking the blockchain of an existing cryptocurrency.

Bitcoins on white background

Considering the fact that Bitcoin (BTC) and Ethereum (ETH) have been the most powerful cryptocurrencies to date, their respective blockchains have been the most modified ones. Now, let’s take a closer look at these cryptocurrency forks and the circumstances that prompted their genesis.

Bitcoin Forks

In essence, forking lies at the very core of the original cryptocurrency, as the first alternative cryptocurrencies to Bitcoin – known as altcoins – were created through the modification of the original Bitcoin open-source database. 

Proposed in 2015, the SegWit (Segregated Witness) protocol was among the first (albite soft) forks on the Bitcoin blockchain. The SegWit protocol was developed as a technological solution to the blockchain’s scalability issue by reducing the size of the encrypted data, thus enabling more blocks to be confirmed on the network at the same time.

Scalability problems later led to the first hard forking of the Bitcoin network. Some of the miners wanted to handle more transaction blocks in a shorter amount of time, so they split the Bitcoin blockchain into two parts. This resulted in the creation of Bitcoin Cash and was followed by several other Bitcoin hard forks that brought more altcoins that have Bitcoin in their names, such as Bitcoin XT, Bitcoin Classic, Bitcoin Gold, etc.  

Ethereum Forks

As a response to a major cyberattack on Ethereum’s DAO (decentralised autonomous organisation), the Ethereum blockchain underwent a hard fork in 2016. Those that hosted full nodes on the network disputed the hard fork’s proposals and declined to upgrade to the new rules. As a result, the old chain is still around and known as Ethereum Classic.

Ethereum fork Ethereum classic

Ethereum’s hard fork was intended to simplify the coin mining process by switching the Proof-of-Work protocol (PoW) with the Proof-of-Stake protocol (PoS). Owing to the Ethereum hard fork, crypto miners could generate coins depending on their coin balance. This change of protocol decreases the energy requirements for the crypto mining process. In turn, this mining method accelerated the processing time, which in turn, lowered the cost of transactions.

FAQ

How do blockchain forks impact cryptocurrencies?

If a cryptocurrency is constructed on a split blockchain, it is likely that this coin will be affected by the fork as well, since there will be two copies of the cryptocurrency operating as autonomous units. 

In practice, a new coin would be created alongside the current one, which would have an impact not only on the functionalities and price of the original cryptocurrency established on the split blockchain network but also on the market value of the digital assets that were associated with the cryptocurrency.

Hard forks, for example, can speed up networks. Since a hard fork typically implies splitting a cryptocurrency in two, miners’ incentives could drop in value, thus decreasing the block time. In turn, networks become faster as a result of the shorter block time.

As another example, crypto splits usually result in two distinct currencies that typically enhance the market competition. The upgrades of the new coin could also boost the scalability of the blockchain.

What effect does forking have on crypto investors or holders of the impacted coin?

When the blockchain of a cryptocurrency experiences a fork, it is common practice for crypto investors and holders of the associated coin to receive an equal amount of both the official version of the cryptocurrency and the new cryptocurrency generated as a result of the blockchain split. 

This incentive is instantly credited to the users’ digital wallets. But as all forked coins don’t do well on the market, this may not represent a major financial advantage to holders of the forked currency.

A Few Words Before You Go…

Forks have a considerable influence on the crypto ecosystem. Both soft and hard forks can cause a partition of the blockchain’s protocol. The soft fork is designed to create a new version of the existing blockchain, whereas the hard fork generates two different blockchains. 

What’s more interesting is the fact that forks can not only generate new cryptocurrencies and enhance existing ones but can also raise many concerns within the blockchain community. In turn, this increases the likelihood of future blockchain forks emerging as a consequence of differences of opinion within the crypto community and among the blockchain developers regarding how a crypto project can be improved.