In 2017, the first Bitcoin hard fork was successfully implemented. It led to the creation of Bitcoin Cash, a new token that was forged off the old blockchain but with a fundamentally different set of rules.
Bitcoin Cash is an example of a blockchain hard fork, and it could have big implications for you as a crypto trader or investor. Learn more about Blockchain.
Blockchain Fork Explained
A blockchain fork is a change in a blockchain’s protocols that results in a deviation or split in the chain. By changing its core protocols, the chain is split into two and the current users have to decide which fork they want to follow.
Blockchain forks are meant to address limitations to the existing network. Since the blockchain source code is open-source, anyone can propose improvements and gather enough user support to implement a fork.
There are two types of blockchain forks; soft forks and hard forks.
Soft Fork
A soft fork is a core change that is backward-compatible. In other words, Users still running the old software can validate the new blocks created using the new protocols. A soft fork requires any majority consensus (at least 51%) in the mining community to be implemented.
Users can upgrade their software for better functionality, or retain the old software. An important example of a soft fork is Segwit, a change in Bitcoin’s transaction protocols to allow for faster and more secure transactions.
Hard Fork
In a blockchain hard fork, a fundamental change in the blockchain’s protocols occurs that is not backwards-compatible. All users wishing to use the new chain have to permanently upgrade to the new system once it attains a strong 91%+ consensus in agreement. This is the kind of fork that created Bitcoin Cash and Bitcoin Gold.
Why Forking Occurs
You may understand the crypto fork meaning in technical terms, but the origin of a fork can be surprisingly trivial. A fork can occur either accidentally or intentionally.
An accidental fork occurs when two different blocks are created at the same time. According to the blockchain protocol, the longest block at any one time is considered valid, so the other block is orphaned and the chain forks at that point.
New crypto forks are instituted by developers for reasons like these:
- As a way of creating a new token without starting from scratch
- To patch flaws in the original protocols
- To upgrade the blockchain’s functionality or future-proof it
- To resolve a major disagreement in the community about the future of the blockchain
Some Famous Blockchain Forks
1. Bitcoin Cash
Bitcoin Cash was a hard fork that occurred to increase the transaction speed in the Bitcoin blockchain. The original Bitcoin block was capped at 1 MB, which can only hold about 2,700 transactions or allow about 7 transactions a second.
Bitcoin Cash or BCash tweaked these rules to have blocks 8-32 MB in size, holding up to 37,000 transactions and allowing over 100 TX/Second.
2. Ethereum Classic
In the famous DAO hack of 2016, $60 million in Ether was stolen. A controversial hard fork was implemented to restore the stolen funds and save Ethereum, but some developers disagreed because they believed blockchain should retain its immutability.
The old Ethereum was subsequently renamed Ethereum Classic, but its user base remains a strong minority.
Conclusion
Knowing how blockchain forks work, how does it concern you? Well, for starters, you will have to make a new decision on whether to move to the new chain or retain the old one.
If you do make the change, you get an equal amount of new coins as you had in the old system, and you can claim these coins when you shift and sell them. That’s free money, any way you look at it.
On the other hand, moving to the new coin could cause you to lose your entire coin balance in the old tokens. At the end of the day, it’s up to you to weigh the risks and rewards and make a prudent choice.
