If you’ve been following the crypto industry for a while, you probably know about the concept of forks in crypto-currency. No matter if you are a newbie in crypto or an advanced trader, in this article you can get a better understanding of forks, how and why they occur in the blockchain, and what consequences they bring.
First of all, there are many approaches to define the concept of a fork. The fork in crypto can be characterized in different ways, but the general understanding is when major changes happen to the blockchain. As you know, blockchain is the main basis of every cryptocurrency that ensures the high safety of the system. Blockchain is also called the distributed ledger where all blocks of confirmed transactions are added in a chain fashion. Also, full information is accessible to users within the system but it cannot be changed in any way. Since cryptocurrencies operate in decentralized networks, all parties must follow the same rules called consensus, managing and maintaining the blockchain network. Otherwise, two separate blockchains are operating in different parts of the network. This phenomenon of forking is also referred to as blockchain branching.
In the cryptocurrency community, all coins have been called a fork, but bitcoin. Their developers, as a rule, took the source code of bitcoin, making minor changes and modifications to it. Further, in 2013–2014 with the development of technological progress, developers started creating new crypto-projects, based on original code. Now, such crypto-currencies are known as altcoins. Also, crypto developers usually consider a fork as a project created by copying the source code from another well-known crypto-currency. In this way, the first bitcoin fork emerged creating the Litecoin crypto-currency. The reason for the forks is quite simple as it occurs due to the disagreements between participants within the system. In the world of cryptocurrencies, it is used for the cases when a new branch of blocks in the blockchain is formed, functioning on some different principles than before.
First forks appeared when new hashing algorithms emerged. They are said to represent certain rules encrypting data in blocks. As blockchain evolved and improved greatly, there was a transition from one hashing technology to another. It was a necessary measure in order to increase the bandwidth of blockchain or reduce the time for transactions validating. As a result, new and modified crypto-currencies emerged, functioning on bitcoin principles, and received their own names.
Moreover, the branching of blockchain protocol updates has led to soft forks and hard forks. Forks are called to facilitate the improvement and updating of the system in the case of disagreements. It became necessary after the crypto-currency phenomenon became well-known all around the world and market capitalization increased rapidly. At the same time, updating all nodes of the network became difficult and even harmful to the blockchain. Gradually, developers began to strive to conduct all updates in the form of soft forks, resorting to hard forks only when absolutely necessary. A hard fork is a rule change in the functional algorithms, having wide consequences for the blockchain network’s entire protocol. As a rule, hard forks lead to the creation of a new crypto-currency. A soft fork is called a modification of the software protocol that is compatible with the previous version. In other words, the new bifurcated chain will follow both the new and old rules of the system operating.
However, forks have a significant impact (both positive and negative) on the cryptocurrency ecosystem as a whole. They enable the creation and improvement of crypto-currency but sometimes lead to crises and conflicts that fuel resentment in the community. As new people come into the cryptocurrency industry with new goals, the role of forks will intensify.
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Valentina BEREZA, Team bit4you