What is Forking in Cryptocurrencies?

Published 19 Jun 2021 by Radhika Aggarwal

Table of Content

  1. How do Forks in Blockchain work?
  2. Types of Forks
  3. Which one is better- Hard fork or Soft Fork?
  4. Importance of Forking

You would have been aware of the word forking if you went through the world of cryptocurrencies. So up till now, there have been many forks taken place in the crypto industry, which has given birth to numerous new cryptocurrencies, the most well-known ones are Bitcoin Cash (BCH), Bitcoin Gold (BTG) & Bitcoin SV(BSV). Now another fork is coming next week, so are you excited to know about that? This fork won’t create a new coin but do make some improvements in the bitcoin network as this is a soft fork the taproot soft fork.

Forking occurs when a set of miners who create bitcoin think that there are more efficient options than the existing bitcoin. Forking implies splitting the chain on which bitcoin runs, making it go in a different direction—with different rules than the existing blockchain as the two would now have different visions of bitcoin.

A cryptocurrency fork is a blockchain network upgrade, i.e., alteration in the source code of a cryptocurrency. Forking happens when a new code is branched out of source code to change the rules of its network slightly; for example- bitcoin cash (Bcash) changed the block size from 1MB to 8MB so more transactions could be processed with each block, bitcoin SV is a fork of Bcash, etc.

It’s up to miners to decide which blockchain to continue using. If there isn’t a consensus, this can result in creating two versions of the blockchain. There can be periods of increased price volatility around such events when the miners disagree with the existing rules of bitcoin, the blockchain forks, or splits into two different blockchains with different rules.

original and fork chain

How do Forks in Blockchain work?

Forking in blockchain shifts the already existing rules and moves them towards a new set of predetermined rules. These defined rules can either be supported by all, none, or some of the participants in the network, but their conditions and situations are unique in every case. These rules must be identified by the nodes running on any given network. If the node decides not to refer to the changes in regulations, it is allowed, but that decision has several consequences.

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Types of Forks

In total, there have been 105 bitcoin hard forks. Out of these 105 forks, only 74 are considered active projects. The remaining 31 forks are considered historic projects that are no longer relevant for the holders of bitcoin. The main forks are described below:

  • Hard Fork: Hard forks are backward-incompatible software updates. Typically, these occur when nodes add new rules that conflict with the laws of old nodes. New nodes can only communicate with others that operate the latest version. As a result, the blockchain splits, creating two separate networks: one with the old rules and the new rules. When the hard fork happened, all the bitcoin holders got bitcoin cash credited to their accounts. An example of the hard fork is when bitcoin was divided into two chains - one was the original bitcoin, and the other one was bitcoin cash.
  • Soft Fork: A soft fork is a backward-compatible upgrade, meaning that the upgraded nodes can still communicate with the non-upgraded ones. You typically see in a soft fork the addition of a new rule that doesn’t clash with the older traditions. For example, a block size decrease can be implemented by soft-forking.

Which one is better- Hard fork or Soft Fork?

  • Fundamentally, both of the types mentioned above of forks serve different purposes. Contentious hard forks can divide a community, but planned ones allow the freedom to modify the software with everybody in agreement.
  • Soft forks are a gentler option. Generally speaking, you’re more limited in what you can do as your new changes can’t conflict with the old rules. That said, if your update can be crafted in such a way that it remains compatible, you don’t need to worry about fragmenting the network.

Hard fork or Soft Fork

Importance of Forking

  • Users might switch over to the new rules and the new coin because they think it is better than the original bitcoin.
  • The fork can have an impact on the cryptocurrency’s community, adoption, and even its price.
  • When a Bitcoin fork occurs, anyone holding any amount of bitcoin at that time will also get the same amount of the new currency.
  • It will not get transferred to your wallet automatically; you have to claim it.
  • The performance of the newly traded forks is challenging to assess, especially in the long term. Due to the extreme volatility present in the cryptocurrency market for most of the forked coins, any performance measure will be directly or indirectly impacted.

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