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Yes, It's Confusing: Bitcoin Forking Explained

Yes, It's Confusing: Bitcoin Forking Explained
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Forks have been in the news a lot recently due to controversy in the bitcoin community.

There was the potential fork that threatened to split bitcoin into two cryptocurrencies after a lengthy “civil war” between miners and developers. That came and went with little issue.

Then there was the sudden fork that actually did permanently split the blockchain on Tuesday, spinning Bitcoin Cash out of bitcoin.

In truth, forks, or splits, in the blockchain happen constantly and usually pass with little news. But unless you actively follow cryptocurrency news, you may not even know what a fork is or why they can be so controversial.

Related Link: As Crisis Is Averted, 3 Takes On The Rise Of Bitcoin

What Is A Fork?

Simply put, a fork is when a cryptocurrency’s blockchain splits into two possible chains either because of a transaction or new rule for what makes a transaction valid.

When they occur, users have to decide which route to follow. The decision is made when a new block is added to either chain. The longer chain will become the legitimate successor to the original, while the other will be “orphaned.”

Only one chain can ultimately be correct, and so transactions that occur on an orphaned chain will be ignored and lost.

This is why miners will typically only want to work on the longer, valid chain and why cryptocurrency owners are advised not to make transactions until a fork can be resolved.

A fork happens any time two miners discover a new block at nearly the same time. These tend to resolve themselves, but can still lead to anxiety among cryptocurrency holders.

Other times, a fork is purposefully introduced so developers can change the rules used to determine a transaction’s validity.

These instances are much more controversial and have to potential to permanently split the chain with both surviving as independent currencies.

There are several specific kinds of forks — user activated, miner activated, software, git, etc. — but they all essentially fall into two categories: hard forks and soft forks.

Hard Forks

As defined by the glossary on bitcoin’s website, a hard fork is “a permanent divergence in the blockchain, commonly occur[ing] when non-upgraded nodes can’t validate blocks created by upgraded nodes that follow newer consensus rules.”

For a hard fork to be successfully implemented, every node must be upgraded to the new rules.

Problems arise when a portion of the cryptocurrency’s community opposes the changes and decides to stick with the old chain.

The ethereum blockchain’s split into Ethereum and Ethereum Classic is a perfect example of that occurring and two variants staying alive.

Here’s a visualization of how hard forks work:

Image: Investopedia

Soft Forks

Bitcoin’s glossary defines a soft fork as a change to a blockchain “wherein only previously valid blocks/transactions are made invalid. Since old nodes will recognise the new blocks as valid, a soft fork is backward-compatible.”

When a soft fork occurs, non-upgraded nodes will still register new transactions as valid but cannot be used to mine new blocks, as the upgraded nodes will reject them.

A soft fork requires the majority of users to support the change, otherwise the upgraded nodes could wind up being on the shortest chain and orphaned by the network.

Soft forks typically present lower risk and therefore are most commonly used to change a blockchain’s rules.

Bitcoin Improvement Protocol 91, which introduced the rule change known as Segwit2x, is an example of a major soft fork that was recently successful, with almost 100 percent of users supporting the change and the holdouts becoming orphaned.

If, however, a significant number of users are dedicated to the change but fall short of a majority, the soft fork could become a hard fork with the upgraded nodes starting a new cryptocurrency.

An example is Bitcoin Cash splitting off from bitcoin. A large group of users still unsatisfied with BIP 91 chose to launch bitcoin Cash to make the blockchain closer to digital cash than digital gold which, while tradable and valuable, is not easily spent.

Related Link: Coinbase Is Courting Serious Legal Trouble By Not Supporting Bitcoin Cash

Its proponents will have to prove in the coming weeks that the there is enough support to keep it alive and growing.

Regardless of the reason or method behind a fork, the best bet for investors who trade and use cryptocurrencies is to hold off on making any transactions until it is resolved.

Here’s a visualization of how soft forks work:

Image: Investopedia

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