At the beginning of cryptocurrency in 2009, there was only Bitcoin (BTC) as the first, prototype virtual currency – or in other words, the first digital cash in the world. Its fully decentralized, peer-to-peer transaction system based on the Bitcoin blockchain was something really innovative and had never been so widely applicable before in the world of finance. The concept of a currency that could be used only on the web, without a physical form that needed to be deposited in bank accounts or kept in wallets, was groundbreaking at the time.
As Bitcoin started gaining the trust of an increasing number of crypto enthusiasts, brokers, startups, and investors, so did the cryptocurrency developer community, which grew exponentially, with new programmer teams creating their own virtual currencies. The Bitcoin blockchain served as a blueprint for creating successful altcoins because the blockchain worked so smoothly and had all the necessary functions to make a digital currency function as it should. Cryptos like Litecoin (LTC), Monero (XMR), Bitcoin Cash (BCH), Ethereum (ETH), and numerous others all took some of their essential characteristics from the BTC blockchain and customized it to provide new functionalities to users.
A lot of the most popular altcoins today are the results of cryptocurrency forks. These forks are basically important changes within existing blockchain networks that in some cases end up as new cryptocurrencies with their own separate blockchains. Almost all changes to the way a blockchain works are considered different types of forks.
Let’s take a closer look at how crypto forking works and give you an overview of the kind of forks that exist.
What Is a Fork in the Blockchain?
The main characteristic that distinguishes a fork from a very minor change of a blockchain is the fact that all forks are events that alter the main chain of the network, duplicate the chain, and implement changes that have a direct impact on the way the blockchain works. Just to be clear, every modification of the network protocol of a blockchain is considered a fork. If a fork happens, the blockchain literally gets divided into two separate paths, the new one with added modifications, while the old one keeps the original network protocol. This is why it’s common that a fork leads to the creation of a totally new cryptocurrency since it simply isn’t the same asset.
Sometimes, forks are the result of large software updates to a blockchain that are so significant that they change some of the core characteristics of an existing cryptocurrency. Such updates are either initiated by the developer teams behind a certain crypto or they are the initiative of a large part of the community that uses a certain blockchain. In these cases, disagreements within the community can happen because a part of the users of a particular blockchain might want to stick to the original blockchain concept rather than the new version.
It’s important to emphasize that without the community, a cryptocurrency can’t survive. This is because the value behind a digital currency is dependent upon the number of people that use it and the trading volume and market capitalization that is the result of its popularity. This is why the community always has a huge impact on the development of all popular cryptocurrencies.
In terms of forks, this means that not all of them have the same impact and significance. They can vary in magnitude – from soft forks that create limited change to hard forks that cause thorough divergence of blockchain paths.
What Are Soft Cryptocurrency Forks?
In some cases, blockchain forks can be backward-reversible. Such forks are called soft forks exactly because of this backwards-reversibility. In practice, this means that network nodes can still verify and register transactions on the blockchain as valid transfers in case of a soft fork because the network recognizes the core programming from the previous version of the blockchain. Such forks will recognize transfers that run using the old rules of the original blockchain, but the freshly updated network nodes won’t be able to create and include new blocks based on old transfer data.
Only blocks filled with transactions that use the new network protocol introduced by the soft fork will be registered by miners and therefore added to the new chain.
Soft forks require large community support to work. If the majority of the community of a cryptocurrency agrees to the proposed updates and changes to the blockchain by the developers, then the soft fork will be effortlessly implemented. The soft fork needs community support because it requires a majority portion of the total miner hashing power of the blockchain. Most of the miners need to donate their hashing power to the developers in order to successfully implement the soft fork changes.
In case that just a smaller portion of the miners offer their support for the fork, a hard fork will happen as a result of less hashing power than required. This is because in order to update a whole blockchain, a lot of hashing power is required since miners, who act as network nodes and power the blockchain with their mining rigs, are necessary to implement a network update in the form of a soft fork.
In case a soft fork is successful, the implemented network updates make the blockchain work more efficiently and smoothly, which is the point of soft forks.
What Are Hard Cryptocurrency Forks?
Hard forks are quite different from soft forks because they bring about such a radical change to a blockchain protocol, that backwards compatibility becomes impossible and irreversible. Hard forks change much of the open-source programming code of a cryptocurrency blockchain and create a totally new blockchain in the process.
This means that network nodes which use the old blockchain protocol from before the hard fork can’t process transactions that use the new rules. They will simply ignore those transactions and register them as invalid transfers that can’t be approved. The backwards compatibility of soft forks enables updated, new nodes to register transactions, while hard forks cut this reversibility and sever ties with the old network protocol. This is why hard forks result in creating an entirely new blockchain and cryptocurrency with a fresh new ecosystem that isn’t tied to the original blockchain, but does use the foundations of that chain.
Hard forks can often happen as the result of disagreement in the community regarding the direction in which a certain blockchain should be updated. These disagreements can sometimes be ugly feuds within the community but they are also sometimes just the fruit of different visions of the future. Blockchain technology is so decentralized and versatile that when a hard fork happens, it doesn’t mean that two sides are damaging each other because of a disagreement. Rather, it means that the resources of a single blockchain are splitting into two separate projects with different features. However, the latest version of a blockchain often brings more advanced functions than those supported by the old nodes of the network.
Also, many hard forks that create new coins are simply projects by developer teams that want to use the advanced and reliable technology of some of the most established blockchains like BTC and ETH to build their own crypto on top of it. In fact, these two blockchains are the most popular networks for creating new cryptocurrencies, which technically come out of hard forks.
Bitcoin Forks Like Bitcoin Cash, Bitcoin Gold, and SegWit
It’s common practice for cryptocurrency forks to occur on popular blockchains. The Bitcoin network is by far the most popular crypto blockchain available. The BTC blockchain was launched in 2009 by Satoshi Nakamoto who presented the Bitcoin whitepaper and introduced the first digital cash to the world. The blockchain technology that powers Bitcoin quickly proved to be very friendly to updates and modifications, which is how the first Bitcoin forks started: as updates to the network protocol that should improve user experience.
Bitcoin XT was the first famous Bitcoin hard fork in 2014, which created the XT version of BTC with a block size of 8MB compared to the original Bitcoin blocks of 1MB of data. This project had some initial success, with over 1,000 network nodes powering the new blockchain. However, the project fell apart just a couple of months after its launch. A similar situation happened with the Bitcoin Classic fork in 2016, which initially had over 2,000 nodes but it quickly lost its initial popularity. Regardless of that, Bitcoin Classic is still available to users today.
The Segregated Witness (SegWit) soft fork is one of the most famous BTC soft forks. It was launched in 2015 with the aim of reducing the size of Bitcoin transfers, making it possible to send more transactions within a single BTC block. This is a very important soft fork that enabled the creation of future hard forks that managed to create even smoother data flow such as Bitcoin Cash (BCH). BCH was launched in 2017 and it increased the block size of the BTC blocks to 8MB, but unlike Bitcoin XT, it achieved widespread acceptance. It is the most popular Bitcoin hard fork today. Bitcoin Gold was a new fork, right after BCH, that enabled easier mining with more conventional GPUs instead of expensive mining rigs.
The Ethereum blockchain is also very popular among developer teams that look to launch their own cryptocurrency by making a fork of the existing blockchain. An important characteristic that makes ETH ideal for creating complex cryptocurrency ecosystems is the ability to facilitate smart contract functionalities and power decentralized applications (DApps).
This means that developers could use the Ethereum network to power blockchain-based businesses such as decentralized finance services, interactive web platforms, and all sorts of advanced applications that don’t rely on centralized web resources from big data companies. Instead, Ethereum offers users the possibility to create their own, decentralized, and fully independent apps using the Ethereum Virtual Machine and the native ETH programming language called Solidity.
Some of the most important Ethereum forks were successful updates to the network that addressed various bugs and vulnerabilities of the network. Ice Age and Homestead were the first two ETH forks and they considerably upgraded various aspects of network security.
The DAO fork of 2016 is rather controversial since it was sparked by hackers stealing 50 million USD worth of ETH from the Decentralized Autonomous Organization (DAO) venture capital fund which was based on the Ethereum network. DAO existed only for a few months in 2016 before being delisted from major crypto exchange platforms such as Binance and Coinbase, effectively leading to the Ethereum Classic (ETC) fork. After this fork, the original ETH blockchain was branched into two chains, Ethereum Classic and Ethereum, which moved on as a hard fork with much improved security.
A Few Ending Words…
Cryptocurrency forks are the result of the technological evolution of the crypto world, which contains thousands of various currencies. Many of these currencies are the result of forks from old chains that created a totally new asset in the process. It is important to understand how crypto forks work and embrace them as a necessity for the development of new cryptos.