The world of cryptocurrencies is full of its own nomenclature; airdrop, mooning, halving… the list is long. But a term that you have surely read on some occasion and whose impact is usually considerable is “fork”.
In this case, when translating fork we would not be faced with its most common meaning (fork), but rather it would be translated as bifurcation. And a fork in a cryptocurrency is, in essence, a bifurcation of it.
What is a fork
When we talk about forking a cryptocurrency we are referring to a major software update on your blockchain network. This update generally changes the rules under which a crypto operates, and depending on its degree of importance, we may be facing a soft update of the entire network or the creation of a new network and a new cryptocurrency.
Forks don't happen for just one reason, but rather There are three main reasons for its implementation. The first is the update of the technology behind a crypto; add features, improve security, increase transaction speed... Any significant improvement that affects the entire network can lead to a fork.
A second reason would be to correct vulnerabilities. If at any point a bug is discovered that compromises the security of the network (and users' crypto), a fork is usually necessary to fix the entire code.
The last reason why forks occur would be due to disagreements in the community behind a crypto. The developers and users of a crypto and its blockchain network may not agree on the direction of the project, or there may be a schism within the development team. In this case, if the positions are irreconcilable, there is most likely a fork.
As mentioned before, a fork can be a soft update or something more radical; what is known as soft or hard fork.
soft fork
A soft fork is a protocol upgrade that is compatible with the old infrastructure. In this way, new rules are introduced into the network but the nodes that make it up can continue using the old ones. while they adapt little by little.
This type of fork does not have significant repercussions for users, as it does not lead to the creation of a new network or cryptocurrency. An example of a soft fork was the implementation of the SegWit upgrade in Bitcoin, which improved transaction speed but did not create an alternative network.
hard forks
On the other hand, there are hard forks, whose existence has much more tangible consequences for a cryptocurrency; mainly the division of the network and the creation of a new one along with its associated cryptocurrency.
Hard forks occur when the network upgrade is not compatible with the old infrastructure and all nodes must be updated if they want to use the new rules. This results in a network that uses the old rules and a new one whose protocol is the updated one.
Some famous cases of hard forks were the split of ETH into Ethereum and Ethereum Classic (Ether), or the split of Bitcoin into Bitcoin Cash and Bitcoin Gold.
Ethereum Classic is actually the original Ethereum. After a computer attack through a project linked to Ethereum called DAO, a new version was created that eliminated all transactions associated with this project from the blockchain network. Part of the users voted to keep the network as it was, which in 2016 led to the hard fork that divided the crypto into Ethereum and Ethereum Classic.
Ether is today fundamentally different from Ethereum, as it remains a proof of work currency (which can be mined) rather than a proof of stake, whose network no longer requires mining.
Source code fork
There is a third type of fork that does not technically split a network; the source code fork. This type of fork occurs when a group of developers use the code of one cryptocurrency as the basis for a new project, thus creating an independent currency from scratch but largely inspired by another. This is the case of Dogecoin, a source code fork of Litecoin, which in turn was a similar fork of Bitcoin.
Impact on price
Forks are one of the events that cause the greatest impact in the sector, so it is advisable to be alert when one is going to occur.
Speculation before a hard fork is usually high, as users expect to receive an equivalent amount of the new crypto. It can also affect the price (negatively) if it is a controversial fork, as it demonstrates the distrust and fragility of the community.
In any case, the forks (whether hard or soft) They should be at the top of priorities when investigating a cryptocurrency.
Leave a Reply