In January 2009, a new financial landscape started gaining traction: The genesis block on the Bitcoin blockchain was mined. Every transaction since has been governed by a clear set of rules. However, the open-source nature of blockchain also created opportunities for refinement. But when the rules or protocols change, they don’t inherently alter the original Bitcoin. Instead, they lead to what’s known as a Bitcoin fork. If you’re curious about Bitcoin forks, including what they are, why they happen and how they impact the crypto landscape, here’s what you need to know.
Defining Bitcoin Forks
In the simplest sense, Bitcoin forks are like branches off of the original blockchain. When a portion of the community wants to alter Bitcoin’s protocols or rules in a significant way, they can use the original blockchain as a jumping-off point but ultimately head in a new direction. The original blockchain – and its associated rules and protocols – also continue forward.
The process became known as forking because the resulting “split” resembles hitting a fork in the road. Both paths are viable and formal, and they share an origin. However, the directions they go from the moment of the split can vary greatly.
Additionally, when a fork takes place, the blockchain that heads in a new direction isn’t always considered Bitcoin in the classic sense. Instead, Bitcoin forks can spur altcoins. While some may have “Bitcoin” in the name, they’re not the same as the original.
Hard Forks vs. Soft Forks: The Basics
In general, there are two types of Bitcoin forks: hard forks and soft forks. Each represents a different approach to deviating from the original blockchain.
With a hard fork, the updates to any protocols or rules aren’t backward compatible. Essentially, the programming changes mean that the original version wouldn’t see the processes the fork uses as valid. For example, if a protocol change altered the size of a block on the blockchain – increasing it from 1 MB to 2 MB — the 2 MB block wouldn’t work with the previous protocol. As a result, the legacy version of the blockchain wouldn’t view records on the fork as valid.
The main issue with hard forks comes with validation and tracking. It could potentially allow some – but not all – Bitcoin transactions to record on both sides of the split. For instance, using the example above, 2 MB blocks would appear on the new version, but not the old one. If a person spends a Bitcoin and it results in a 2 MB block, one chain would see that the Bitcoin had a new owner, while the old version (which can’t process 2 MB blocks) would believe the Bitcoin was with its previous owner. In some cases, that would mean the original owner could spend that same Bitcoin again, suggesting that transaction would rely on the old blockchain for validation.
Soft forks don’t have that issue. Instead, any protocol changes with a soft fork are backward compatible. That ensures both sides of the split can monitor relevant transactions, preventing problems with validation that could lead to trouble.
Why Do Forks Happen?
Bitcoin and cryptocurrency forks happen when a community feels a change to the original protocols is necessary or the rules on the blockchain need updating. The most common reasons for pursuing changes typically have to do with security or efficiency. For example, block sizes may get updated to speed up transaction processing, or vulnerabilities might get closed to prevent hacking.
However, a fork can also occur if a community wants to alter functionality or if the community doesn’t agree with a particular decision or transaction. One prime example of the latter situation involved an Ethereum hack.
In April 2016, an experiment was underway involving a Distributed Autonomous Organization (DAO). It was effectively a crowdfunding effort to create a venture capital firm that wasn’t controlled by individuals or a board but by everyone who took part. However, in June 2016, $50 million in Ether – the Ethereum utility token – was stolen.
The community was conflicted about how to proceed. Some members advocated for rolling back the blockchain to recover the stolen funds. Others felt that a rollback was inherently against cryptocurrency principles. In the end, Ethereum did the rollback, a move that resulted in a hard fork.
Ethereum Classic still follows the original blockchain. Ethereum is based on the rolled back variant.
Examples of Bitcoin Forks
In 2015, the concept of Segregated Witness (SegWit) entered the Bitcoin landscape. The goal was to reduce Bitcoin transaction sizes to allow more transactions to co-occur. The update itself resulted in a soft fork. However, after its proposal, a hard fork also occurred.
Bitcoin Cash was the result of some users’ and developers’ preference to avoid the changes proposed by SegWit. It split away from the main blockchain in 2017 and ultimately became the most successful hard fork on record.
Not long after Bitcoin Cash split away, Bitcoin Gold entered the landscape. This move wasn’t spurred by SegWit in the same manner. Instead, the creators felt that mining had become too challenging – both in regards to computer hardware and software requirements. They simply wanted to make mining with basic GPUs possible once more.
The Impact of Forks on Crypto
In many cases, forks don’t just impact the specific coin involved; they also have larger impacts on the cryptocurrency landscape. Precisely what that involves depends on the type of fork and the changes it entails.
For example, a soft fork that boosts security or streamlines transactions may capture greater market share or make other coins less appealing. In some cases, a fork provides owners of the original coin with an equal amount of the newly created altcoin, effectively doubling their potential position in the market.
One thing that’s true of nearly any fork is that it’s marked by a period of instability, one that may reverberate through the broader crypto landscape. Price movements for the associated cryptos are common when a fork is on the horizon, and notable volatility can remain even once the fork occurs. In some cases, those value shifts alter public sentiment in the overall crypto market, resulting in value fluctuations across coins that aren’t connected to the fork.
In the end, the volatility does typically calm, giving investors a better initial idea of the fork’s value. However, only time will tell if it’ll be a success.