After the launch of Bitcoin in 2009, the DeFi community looked to develop ways to scale Bitcoin. Two solutions were proposed by developers — increase the average block size or exclude parts of the transaction to fit more data.
After much disagreement amongst the community, Bitcoin Cash was launched in 2017, increasing the size of blocks to between 8 MB and 32 MB, which made it possible to process more transactions than Bitcoin’s previous capacity. Even so, what does forking mean for financial institutions, how does it impact crypto traders and what will central banks do about these currencies.
Overview of Blockchain
Blockchain is a database, a collection of information stored electronically on a computer system. That data is kept secure though a consensus mechanism, the most prevalent being the Proof-of-Work (PoW) and Proof-of-Stake (PoS) mechanisms. These mechanisms are used to achieve agreement and security across the decentralized network.
The blockchain is formed by the individual assembly of “blocks,” where each block contains multiple transactions converted to a hash. When a new block is mined, the hash of the last block in the chain combines with a new set of transactions and creates a fixed-length hash for its newly created block.
Because these hashes are fixed, they secure the network because no one could estimate the amount of data under that hash. Yes, hours and hours of electricity are used to power these networks. While trying to use the lowest amount of electricity possible is important for many projects, it’s important to remember that forking is often better than letting a network balloon out of control.
What is Forking in Cryptocurrency?
A fork takes place when groups of miners and developers can't agree on updates to the blockchain network. As a result, one group continues to operate under the same rules, while the other branches off and generates a new blockchain with updated software. Forks are common in the cryptocurrency industry as currencies grow and developers want projects to move in different directions.
However, there’s no need for a massive schism that breaks up the original entity. Instead, the forking developers simply move in a new direction, create a new name and continue as they see fit while the original token stays its course.
Hard Fork vs. Soft Fork
A hard fork refers to a radical change to a blockchain protocol which results in two branches, one that follows the previous protocol and one that follows the new protocol. Once a user hard forks a protocol, that version rejects all transactions from the original protocol.
A soft fork, on the other hand, is a change in software protocol where only previous transaction blocks are made invalid. The soft fork is backwards compatible, as opposed to a hard fork that requires all nodes to be upgraded to agree.
Biggest Forks in Crypto History
There have been many forks in crypto history. Here is a quick rundown of the biggest forks in the cryptocurrency realm.
Bitcoin Cash Fork
The Bitcoin Cash fork was a result of the disagreement within the Bitcoin community, which was created to accommodate a larger block size and allow more transactions on the blockchain. Since it’s fork from Bitcoin, Bitcoin Cash underwent another fork in 2018 and split into Bitcoin Cash ABC and Bitcoin Cash SV (Satoshi Vision). This disagreement was due to protocol updates that incorporated larger block sizes on Bitcoin Cash.
While a larger block size helps scale blockchains, it limits the degree of decentralization due to the large amounts of data that have to be stored from larger block sizes.
Dogecoin was launched by Billy Markus as essentially a weekend project. The founder had previously made an Animal Crossing inspired token — BELLS. This token received little credibility and was disregarded, although he found himself in a IRC chat room, where someone had linked dogecoin.com.
At the bottom of the website was a message along the lines of “contact if you want to make this a real coin.” Billy seized the opportunity and reached out, finishing the project that same night. A few days later the project launched as the infamous Dogecoin.
Ethereum Classic Fork
In 2017, a Decentralized Autonomous Organization (DAO) raised over $150 million worth of Ethereum. This DAO was hacked due to vulnerabilities in its code base. Essentially, the hacker was able to send a large amount of ETH while subsequently “asking” the DAO smart contract to give it back. This process was repeated several times, which is known as a recursive call vulnerability and was never patched.
The Ethereum blockchain was eventually hard-forked to restore the stolen funds, although not all parties agreed. This led to the network splitting into 2 distinct blockchains — Ethereum and Ethereum Classic.
Solana Shutdown Fork Accident
In September 2021, Solana had a network shutdown incident where $12 billion was locked on the network. This was caused by an unknown load of 400,000 transactions per second and the network is only able to handle 50,000 transactions per second.
The network was unable to verify what was true and what wasn't so the blockchain started forking, leading to parallel blockchains. This forking led to excessive memory consumption, causing nodes to go offline. Eventually the validator community elected to restart the network. Once the network was down, validators and developers were able to verify which smart contracts were true. No investors lost their assets.
Investing in Cryptocurrency Forks
There are many different forked cryptocurrencies to choose from, but their utility and value may be questionable. The most promising and most established is Litecoin, which has established itself as a useful asset for microtransactions, making it much easier for individuals to send payments without high fees.
Take a close look at forked cryptocurrencies before you proceed with investment. And like any financial commitment, never invest more than you can afford to lose.
Frequently Asked Questions
Are all crypto forks a good idea?
Only time will tell if a crypto fork is a good idea, but many times, forks offer more diversity and variety to the investing public.
Why do cryptocurrencies fork?
Disagreements among developers often lead to crypto forks so that one faction can continue on while the other creates a new cryptocurrency protocol.
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