Forking cryptocurrency

A majority of the community needs to agree before any fundamental changes can be implemented, or else you risk a hard break. The result of a successful upgrade is that a new coin will fork off from the blockchain, from the block where the upgrade took place. Two separate coins with two separate ledgers, all originating from the same blockchain. One Blockchain vs Two Blockchains In the case of updates like SegWit, everyone ideally updates to the new protocol, so only one coin exists.

In cases of hard forks, like Bitcoin Cash , two different coins and blockchains will run simultaneously after the fork. Both blockchains are adopted, which means they co-exist and operate independently of each another with roughly equal community adoption and value. The first outcome is the most common, as happened with Ethereum and Ethereum Classic, with Ethereum vastly outperforming Ethereum Classic.

The second is rarer, but it does happen. Bitcoin Cash and Bitcoin ended up broadly coexisting once the SegWit 2. There are often competing visions for the future of a cryptocurrency and this can lead to a point where traders and miners feel that they have no choice but to go their separate ways. Bitcoin Forks to Bitcoin Cash For example, the lead up to the Bitcoin and Bitcoin Cash split happened after a series of increasingly venomous debates within the community.

SegWit 2. X On the other hand, sometimes, this level of disruption can be enough to prevent a fork from taking place. The controversial SegWit 2. What Are the Effects of a Hard Fork? Hard forks can have a profound impact on the cryptocurrency and not just because of the uncertainty caused. The Bitcoin Cash hard fork is a good example of a quirk that can occur. For example, if you had held 10 Bitcoin at the time of the Bitcoin Cash fork, you would have 10 Bitcoin Cash.

This can lead to some really interesting waves within the market. Impact of Large Traders Large traders, or whales, can make big waves on the market. Whales are generally large organizations that own hundreds of thousands of Bitcoins. This is enough that their decisions will strongly influence the direction of the market. Some large private traders, or dolphins, also have enough stake to influence the market to a certain degree. This gives them a strong incentive to increase their stake in the parent token.

Thus, they begin to buy every token they can find. Their huge size means that they can artificially drive the price of the parent currency higher in the lead up to the fork as the whales and dolphins buy up everything they can find. They will continue to do this until the night of the split. The whales are rewarded with new tokens on a one-to-one ratio. Because whales know that the price of the parent company has been inflated by their actions they proceed to dump both the new token and the parent token on every exchange they can.

This can cause the value of both the forked and parent token to crash in value. Over time, their values will begin to stabilize as the traders use their profits to purchase more cryptocurrency coins. Not All Forks Result in Free Cryptocurrency The above example also applies to splits where the entire blockchain is cloned. Many forks only copy the underlying code, so while a new coin is corrected it does not create duplicates.

In these cases, traders act a little differently. It is also possible to see traders largely abandon the original cryptocurrency in favor of the new fork, as happened with Ethereum and Ethereum Classic with the former strongly outcompeting the latter. A hard fork marks an unstable time for a cryptocurrency. The community will often be divided over the issue and the market is generally very volatile, even by cryptocurrency standards.

How you will react will largely depend on the stake you have in the currency and the type of fork you are looking at. Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. This type of a fork is used by blockchain developers to implement changes to the protocol. For instance, developers may use an intentional fork to increase block size , reduce block time , or even implement an entirely new consensus algorithm.

An intentional fork can be hard or soft. The two differ from each other in terms of compatibility with the other chain and their applications. Soft forks and hard forks A hard fork is a fork that introduces new rules and requires the nodes in the network to upgrade their software. Consider a blockchain with a block size limit of 1 MB.

If you wanted larger blocks that could store up to 8 MB of data, you would have to implement a new set of rules that would increase the block size limit from 1 MB to 8 MB. This would result in a hard fork. When a hard fork occurs, the community members users and miners must make a decision. They can either update their node and switch to the newly-forked chain, or they can keep running the old software. Once a change is put in place, any nodes that fail to upgrade to the new consensus rules can no longer participate in the consensus mechanism.

They are forced onto a separate chain the moment the hard fork takes place. Non-upgraded systems can no longer process the new consensus rules, making a blockchain split by a hard fork forward incompatible with the main chain. As opposed to hard forks, changes implemented by soft forks make the chains forward compatible.

To be forward compatible, blocks created under new rules must also be valid under the old rules but not the other way around. Due to that, a soft fork does not require nodes to be upgraded. They can keep running the old software version and still participate in the upgraded network as validators of transactions. Forks in practice Blockchain forks occur quite often. In fact, they are one of the ways of creating new cryptocurrencies.

Some popular currencies are products of hard forks. An example is Bitcoin Cash , which forked from Bitcoin in August Another example of a hard fork is Ethereum Classic.

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Bitcoin Cash and Bitcoin ended up broadly coexisting once the SegWit 2. There are often competing visions for the future of a cryptocurrency and this can lead to a point where traders and miners feel that they have no choice but to go their separate ways. Bitcoin Forks to Bitcoin Cash For example, the lead up to the Bitcoin and Bitcoin Cash split happened after a series of increasingly venomous debates within the community.

SegWit 2. X On the other hand, sometimes, this level of disruption can be enough to prevent a fork from taking place. The controversial SegWit 2. What Are the Effects of a Hard Fork? Hard forks can have a profound impact on the cryptocurrency and not just because of the uncertainty caused.

The Bitcoin Cash hard fork is a good example of a quirk that can occur. For example, if you had held 10 Bitcoin at the time of the Bitcoin Cash fork, you would have 10 Bitcoin Cash. This can lead to some really interesting waves within the market. Impact of Large Traders Large traders, or whales, can make big waves on the market. Whales are generally large organizations that own hundreds of thousands of Bitcoins. This is enough that their decisions will strongly influence the direction of the market.

Some large private traders, or dolphins, also have enough stake to influence the market to a certain degree. This gives them a strong incentive to increase their stake in the parent token. Thus, they begin to buy every token they can find. Their huge size means that they can artificially drive the price of the parent currency higher in the lead up to the fork as the whales and dolphins buy up everything they can find.

They will continue to do this until the night of the split. The whales are rewarded with new tokens on a one-to-one ratio. Because whales know that the price of the parent company has been inflated by their actions they proceed to dump both the new token and the parent token on every exchange they can. This can cause the value of both the forked and parent token to crash in value.

Over time, their values will begin to stabilize as the traders use their profits to purchase more cryptocurrency coins. Not All Forks Result in Free Cryptocurrency The above example also applies to splits where the entire blockchain is cloned. Many forks only copy the underlying code, so while a new coin is corrected it does not create duplicates.

In these cases, traders act a little differently. It is also possible to see traders largely abandon the original cryptocurrency in favor of the new fork, as happened with Ethereum and Ethereum Classic with the former strongly outcompeting the latter. A hard fork marks an unstable time for a cryptocurrency. The community will often be divided over the issue and the market is generally very volatile, even by cryptocurrency standards.

How you will react will largely depend on the stake you have in the currency and the type of fork you are looking at. Important: This is not investment advice. We present a number of common arguments for and against investing in this commodity. Please seek professional advice before making investment decisions.

The downside of this is that other large traders are doing the same. If you are concerned that you might not be able to react quickly enough to sell off before the whales, you might be better advised to sell your coins just before the fork. You can then use this to buy a bigger share after the inevitable crash. If you believe that the fork will help the currency, one course of action would be to scoop up currency from concerned users, taking advantage of price fluctuations to increase your stake.

If you believe that the fork will be bad for the currency then it might be advisable to sell before the crash. Remember, there is still a chance the currency will split if the community is not behind the fork. Remember That Your Capital is at Risk Remember that, no matter how certain you are, the market will not always react the way you assume it will.

In general, in blockchain technology, the governance system is built with trust in the code in terms and conditions embedded in the blockchain and not necessarily with confidence in holders and their ability to make decisions, as opposed to traditional finance that works within centralised power. For example, in banks, top executives usually make significant decisions regarding rules and regulations for the entire organisation and the customers. Governance in the crypto world offers the opposite - it's decentralised, therefore, less likely to be manipulated.

For this article, the community of people who own the cryptocurrency are the ones who make the decision. A fork is essentially a change in the protocol, in the code. In simple words, this is how a blockchain network decides against how the rules will be for the network, and a fork means a change in the network's constitution. However, when many decision-makers need to reach a consensus, it can be hard to come to a decision.

That's where hard and soft forks come in. A hard fork is making a decision without consensus. And a soft fork is decided with consensus from the cryptocurrency owners. What Is A Crypto Hard Fork As we already mentioned, a hard fork is a change in the network protocol without consensus. There are a few reasons why hard fork events happen: Add functionality Resolve a disagreement within a cryptocurrency's community Reverse transactions on the blockchain Sometimes, accidental hard forks might appear.

For example, when two miners find the same block at about the same time. Accidental hard forks happen more often, but they are usually fixed before being noticed. Accidental forks happen when two miners find the same block simultaneously. They get resolved when the subsequent block is added to the chain, and automatically, that chain becomes the longest chain in the blockchain. Hard forks usually result in a split in the network and can create two different divided networks because they disagree on the said protocol change.

What Is A Soft Fork A soft fork is a change in the network protocol that happens with the community's consensus. In simple terms, everyone agrees that a particular feature needs to be added or removed from the protocol. When everyone agrees, the "old" blocks and "new" blocks are both going to be valid.

The blockchain remains one, and blocks created before and after are recognised as part of the block. Soft forks are the most favourable way to upgrade and change a network protocol. However, getting consensus is not easy. That's why some networks end up upgrading with hard forks. Consensus is required for a soft fork but not for a hard fork.

Network level changes In soft forks, changes happen at the network level. Since everyone on the network agrees to the proposed decision - there is no need to modify the protocol. As opposed to a hard fork, the protocol needs to be modified to make a change in the blockchain forcefully. Upgrade Think of your mobile software upgrades. You can use your phone nearly with no issues even if you don't get the latest version of iOS, for example.

Similarly, soft fork allows the old and new versions of the cryptocurrency to work under the same umbrella. However, a hard fork requires all users to upgrade to continue using the cryptocurrency. Split Hard forks create two sets of chains. The nodes that didn't upgrade as discussed above will be abandoned. That is the split. The main chain continues to exist and operate under the same name, and the split chain will no longer be used or become a separate cryptocurrency.

For example, this is how Litecoin — the first alt-coin, has come into existence. Ethereum then had a hard fork by going back to the pre-hack version of the blockchain and returning the lost funds. Returning the funds is only possible with a hard fork because it happens on the Protocol level. If ETH chose to do a soft fork, none of the funds would be returned.

Table 1: Comparison table of Hard vs Soft Forks Examples Of Major Forks That Happened Recently Forks often happen with different cryptocurrencies as different networks try to address "problems" that are not allowing the network's wider adoption and usability. Read on to find out about some of the most recent forks that happened in prominent cryptocurrency networks, where soft and hard forks can be impactful enough to influence crypto investors' buy and sell strategies in the short and long term.

It has been the most significant change in the bitcoin network protocol in the last four years. The upgrade entails more efficient transactions and extra privacy and anonymity. The way single and multi-signature transactions will look identical, bringing another layer of security and anonymity to the network.

Taproot is not a single fork but a combination of three main upgrades to the network that resulted from consensus. This consensus is rare for the Bitcoin network, and Taproot was anticipated for a relatively long time. It was first proposed by Greg Maxwell in Before this upgrade, Bitcoin had a successful soft fork, SegWit upgrade, that went live in It helped make the transaction faster and cheaper by removing the witness data from the main block.