The blockchain is vital to creating cryptocurrencies like Bitcoin, Ethereum, and Cardano. Blockchains are immutable digital ledgers shared across a network of computers used to keep records of transactions and assets. These data are stored in blocks and connected in a chain-like pattern.
A blockchain fork occurs when there’s a change in the underlying protocol of the blockchain, and new features and upgrades are introduced to the blockchain to benefit its community and users. Picture this as the blockchain splitting into two parts.
While the general idea behind a blockchain fork is for the best, it’s sometimes perceived as otherwise, leading to a more complex situation. This article explains explicitly all there’s to know about a blockchain fork; its implication, the types of forks, and so much more.
Components And Features of a Blockchain in Details
There are several components and features of a blockchain, and being open-source is one; this gives developers or the blockchain community access to the blockchain codes—protocol—for examining and introducing modifications where integral. These changes can improve the security, transaction speed, or throughput.
When such changes are made, this shifts how nodes—the decentralized computer responsible for validating blockchain transactions—work. A blockchain fork is the result of this modification.
Types of Blockchain Forks
Blockchain forks are either intentional or accidental.
An accidental fork occurs when two or more nodes validate the same transaction block and add it to the blockchain creating another extension to the main chain. This doesn’t lead to a significant issue, and it’s temporary since the nodes continue to add blocks on the longer chain.
Intentional blockchain forks are of two types: soft and hard forks, with distinct nuances. This type of blockchain fork occurs when the blockchain splits into two and becomes independent chains due to an agreed modification or disagreements among the network’s participants over the changes to be made, such as the type of consensus mechanism to use and block size. The latter leads to the creation of a new cryptocurrency and blockchain protocol governing the network.
What Is a Hard Fork
A hard fork occurs when there’s an upgrade in the blockchain’s protocol or codes that require the network nodes to upgrade their software completely—leading to predominately two chains; the first which follows the rule of the legacy/original blockchain, and the other chain that relies on the new rule. This type of fork is referred to as backward-incompatible since nodes won’t be able to be involved in validating new transactions on the new chains.
More often than not, hard forks are permanent; the network participant following the legacy blockchain rule never switches to the new rule and vice versa. When this change eventually happens, both chains will have their cryptocurrency; an example is the Bitcoin hard fork that created bitcoin (BTC) and bitcoin cash (BCH).
The decision to move to a new chain isn’t only a node’s decision; users are also tasked with switching chains. Some common examples of a hard fork are observed with blockchains like Bitcoin and Ethereum: Ethereum’s Byzantium, which was to increase the transaction speed and the blockchain’s security, Monero’s Ring Confidential Transactions (RCT) that allowed hiding the number of transactions on its chain for improved privacy and security.
Nodes running the newly updated protocol will only approve recently upgraded blocks, while the nodes running on the legacy protocol can only approve old ones.
What is a Soft Fork
A soft Fork, on the other hand, isn’t as rigid as a hard fork. They are mostly referenced as forward-compatible because the legacy nodes can approve old and new blocks without upgrading their software. The difference is that nodes can’t approve old blocks following the new protocol rule.
Visualize this as an upgrade of the operating system of a mobile device or computer. After this upgrade, users on the updated operating systems model won’t be able to use their apps on the previous model. And users who didn’t upgrade their operating system model will still function perfectly.
An example of a soft fork is the segwit Bitcoin upgrade implemented in 2015. This upgrade improved Bitcoin’s block size, reduced fees, and increased transaction speed.
Other notable examples of a soft fork include the reduction of Bitcoin’s block limit —which was initially limitless—to 1 MB; another is the implementation of Pay-to-script-hash on the Bitcoin network, allowing a Bitcoin sender to put specific instructions that must be fulfilled before the receiver can access the Bitcoin.
Why Do Blockchain Forks Happen
There are several reasons why a blockchain fork occurs. Ideally, the general idea for the blockchain fork is to improve the network; there can be more to it. Here are some of the primary reasons why it happens:
- Fixing Security Issues: this is one primary reason a blockchain community will implement a fork. The need to improve the security of the blockchain by updating the existing protocol to accommodate new rules to secure the system.
- Transaction Reversal: in some instances, malicious actors can hack the blockchain protocol, and funds on the chain will be siphoned into the hacker’s wallet. In such a scenario, the blockchain community can come together and decide to reverse the transaction when they reach a consensus. This happened during the DAO hack in 2016.
- Upgrading the blockchain: this is the most common reason for a blockchain fork. This is done to add new functionalities to support existing ones and improve the blockchain with more use cases.
- Resolve Community Dispute: Another reason for having a fork on a blockchain is when the community doesn’t agree on some specific rules and guidelines that are being proposed or already exist. When either happens, the blockchain splits into two, with each chain operating independently.
Example of Blockchain Forks
The DAO Hack Fork: How Ethereum Classic (ETC) and Ethereum(ETH)
The DAO is a decentralized autonomous organization (DAO) that launched on the Ethereum blockchain in 2016. The project served as a venture capitalist firm governed by smart contracts. Smart contracts are blockchain codes containing specific rules executed when predetermined conditions are met.
Following the launch, The DAO raised $150 million worth of Ether (ETH) in a crowdfunding effort. This was before the era of the initial coin offering (ICO). Shortly after the launch, The DAO was hacked for $60 million from 11,000 users, which caused an enormous uproar and breach of trust in the Ethereum community.
In response to the hack, a series of solutions were proposed. The first was from Vitalik Buterin, who suggested a soft fork that would withhold the funds from hackers. However, this was rejected by the Ethereum community, including the “supposed” hacker claiming the act didn’t break any rule and they were willing to take legal action if the soft fork proceeded.
The other suggestion which led to the hard fork was for the stolen Ether to be reversed into the wallets of those it was stolen from. This caused a tremendous uproar as many questioned the integrity and censorship resistance of the blockchain. The community decided to go for the hard fork with the legacy chain running as Ethereum Classic (ETC) and the newer chain, which runs as Ethereum (ETH).
Bitcoin and Bitcoin Cash
Another Example of a blockchain hard fork is observed with Bitcoin and Bitcoin Cash. After the introduction of Bitcoin in 2009, adoption grew, with the number of users transacting with the digital currency increasing. Some problems arose, including slow transactions and the high fees involved in trading bitcoin.
In 2017, a group of Bitcoin operators consisting of 85% of miners and businesses on the network agreed to implement what is known as the Segregated Witness 2X (SegWit2X), which will increase the block size on Bitcoin’s chain.
While this was supposed to be revolutionary, many fired back from the community, some claiming SegWit2X was done behind closed doors and didn’t involve Bitcoin core developers, among other participants. They also noted that SegWit2X would be swaying Bitcoin from Satoshi Nakomoto— the pseudonymous creator of Bitcoin—idea, and it was a selfish move that suited only the big Bitcoin operators. Instead, they proposed the implementation of the Bitcoin Improvement Proposal (BIP) 418 that implemented the SegWit as opposed to SegWit2X.
However, some Bitcoin operators decided to implement SegWit2X in August 2017, leading to the creation of Bitcoin Cash. The upgrade then saw the block size grow to 8 MB from 1 MB. Currently, Bitcoin Cash has a block size of 32 MB. Although the aim for faster and cheaper transactions was achieved, Bitcoin Cash (BCH) hasn’t gained more adoption than Bitcoin.
There have been numerous upgrades since the first Bitcoin hard fork in 2017. An example is the Bitcoin Cash SV, a modification of Bitcoin Cash introduced in November 2018. The ‘SV’ is called Satoshi Vision since this fork was to improve the transaction speed and scale Bitcoin while sticking to Satoshi Nakamoto’s initial plan.
Bitcoin Cash SV and Bitcoin Cash ABC
Bitcoin Cash, formed from Bitcoin, was eventually forked into Bitcoin Cash SV and Bitcoin Cash Adjustable Blocksize Cap (BCH ABC). The disagreement between the Bitcoin cash community led to the hard fork that gave rise to both.
Bitcoin Cash SV aimed at using the blockchain as a payment protocol, increasing the block size to 128 MB, among other technology improvements on the blockchain, while maintaining the true vision of Satoshi Nakamoto. Bitcoin Cash ABC had a different mission, including introducing oracles and smart contracts on the blockchain.
There were also the issues of which blockchain should get the original Bitcoin Cash ticker symbol post-hard fork. This led to a hash war among both blockchain parties trying to prove that they had a better mining power over the other which would be evident depending on which blockchain had the longest chain.
During this period, the price of BTC and the cryptocurrency associated with the blockchain tanked, and $12 million was lost by miners of both blockchains in that period. Also, cryptocurrency exchanges had to halt transactions on both exchanges because of the possibility of a replay value.
Bitcoin Cash ABC eventually had a longer chain than Bitcoin SV, and the Bitcoin Cash ticker symbol — “BCH”— was assigned to the former by multiple cryptocurrency exchanges, including Kraken, Coinbase, and Bitstamp.
Nowadays, cryptocurrency exchanges announce whether or not they support a blockchain; here’s Binance doing that:
Benefits and Risks of A Blockchain Fork
While the goal of a blockchain fork is to improve the blockchain’s network, there are certain benefits to gain beyond the improved underlying tech of the blockchain; also, a blockchain fork has negative impacts.
Benefits of a Blockchain Fork
The most apparent benefit of any blockchain fork done rightly is the introduction of new technologies to facilitate the blockchain’s effectiveness. This might include increasing or decreasing the block size of the blockchain and changing the consensus mechanism of the blockchain, among other possible developments that might be introduced.
Free Coin/ Token
A blockchain hard fork leads to the creation of another chain. This new chain will have its cryptocurrency separate from that of the original blockchain; this happened in the case of Ethereum, leading to Ether (ETH) and Ethereum Classic (ETC).
When a hard fork occurs, the token holder of the legacy coin will receive the equivalent token on the new chain. After receiving the new token, it can be transacted for other tokens and converted to fiat. To be eligible for the free token, investors must ensure they hold the legacy on a supported crypto exchange or wallet.
Risk of a Blockchain Fork
Loss of Fund
The news of a blockchain fork causes unrest and leads to a lot of speculation about the cryptocurrency associated with the blockchain resulting in high selling pressure. Holding this cryptocurrency exposes investors to potential losses.
There are a few tips that can help mitigate the risk involved in this, including:
- Maintaining a diverse portfolio of tokens rather than holding only the token of the forked network.
- By conducting due diligence, investors ensure they are not holding on to tokens of a forked blockchain with no clear roadmap for the future chain.
- This last tip is for investors who understand trading futures markets. Investors in this category can give themselves an edge trading in the market direction by buying or selling with leverage.
There are two sides to a blockchain fork; while it has good elements, it has its downside. A fork is usually fostered when the community’s vision doesn’t align. More blockchain fork situations can happen with more innovations coming into the crypto and blockchain ecosystem. The blockchain community and participants need to develop a solid road map and be open to technological advances.