1. What is fork?
2. Types of cryptocurrency forks:
2.1. Hard fork.
2.2. Soft fork.
3. Difference between altcoins and forks.
4. Difference between tokens and forks.
5. Hard forks of famous cryptocurrencies.
Every man, who watches the cryptocurrency world, heard about fork. However, not everyone understands, how they occur.
Fork is a branch that occurs at change of basic rules, according to which blocks are considered authentic. It occurs at a time when some developers and users believe that existing conditions require changes.
During this operation, all chain of blocks bifurcates. One branch continues develop based on previously established rules. Another parallel branch builts according to new rules.
The appearance of cryptocurrency fork look like to appearance of new versions of open source software. Very often developers of any free program open its code to give interested people the opportunity to create new useful programs based on their product. However, the cryptocurrency fork differs from other program thanks to blockchain.
The main command of cryptocurrency can plan and manage fork. At the same time, a group of developers, who are dissatisfied with any side of the project, can initiate changes in blockchain.
Changes in blockchain are characterized by open source code and democratic development. They are proposed and implemented quite often, and usually accepted as a normal component of cryptocurrency ecosystem. This approach allows the community to assess and decide which ideas are most promising. This also means that no group has absolute control to development of cryptocurrency project.
There are two types of cryptocurrency forks: hard and soft. They solve the same tasks and create secure, fast and scalable block system. The difference lies in nature of the changes.
|Soft Fork||The developers make minor changes to the code of blockchain, which don’t interfere to further work of the system.||Segwit2|
|Hard Fork||Developers make radical changes, because of which appears the new blockchain. The chains separate on certain block.
Specialists make a so-called “snapshot”, they copy all information into a new chain.
After the separation point, the two branches of blockchain are independent of each other and no have common transactions.
|Bitcoin Cash, Ethereum Classic, Zcash, etc.|
(Differences between two types of forks)
A significant change in the rules of blockchain is called hard fork. A new chain of blocks separates from the old and exists independently with this code modification.
Hard fork is significant change that lead to creation of a new blockchain, when transactions are incompatible between versions. The transactions of the old block aren’t recognized as new, and conversely. Nodes that continue to use the old version of software will to consider the new transactions as invalid.
In this case, one of the formed branches may die, but it can also survive. This depends on the distribution of the hash power between the chains. A branch with a higher power has a better chance of success. As the most obvious example of such scenario, we can recall the summer of 2016 and Ethereum network. The new chain continued to exist under the former name (ETH) after update. But at the same time, original chain called Ethereum Classic (ETC) has survived and continues to develop. Thus, developers created a new cryptocurrency.
Soft fork is a modification of the blockchain code, which is backward compatible with the previous system. It’s update of blockchain rules. In this case, you don’t need to reinstall the software, because a single chain of blocks persists.
For example, developers are introducing a new format for the wallet’s address. At the same time you can still transfer money to old addresses, they remain valid.
The most famous example of soft fork is Segregated Witness (Segwit). The development that modifies the Bitcoin system. Segwit managed to do the following:
- Increase the number of transactions included in the block. This led to increase reward for the miners.
- Reduce the amount of commissions.
- Increase flow capacity of the block. Scalability reduced the wait time for transaction verification.
- Increase security of the system. The emergence of multi-signatures reduced the risk of stealing money.
- Optimize the block. This facilitates work of subsequent developers. Now you can implement Lightning Network, smart contracts and other useful developments.
There are two examples of soft changes for Bitcoin:
- Introduction of standard for verification of cryptographic signatures BIP 66. This event occurred in 2015.
- Introduction of the new format of Bech32 addresses, including Base32. It happened in 2017.
Journalists pay more attention to hard than soft fork, so many updates of blockchain are unnoticed for simple users.
Lately, there are many talks about so-called “custom soft fork”, that is about changes in the code, which anyone can enter at any time: miner, crypto exchange, investor-trader. This idea hasn’t practical implementation, but has many opponents.
The problem is in two moments:
- Predictability of code execution, compatibility with previous versions. Elimination of errors and testing is a long and complex process, even such large networks as Ethereum regularly collide with emergencies. Because of these situations, people lose access to their money. Therefore, the code written by unknown programmer can cause many troubles.
- Protection from hackers. The person who introduces the update can be a swindler. As a result, the funds of owners can be stolen.
For these reasons, we will not see such changes of crypto industry in the near future.
(infographic of hard fork)
Altcoin is any alternative cryptocurrency, except Bitcoin. In practice, altcoin and fork are very vague concepts. The difference in the context of using these terms:
- The specialists use the word “altcoin» for describe all cryptocurrency, except Bitcoin. Altcoin is alternative coin, no Bitcoin.
- Users employ the word “fork”, when they say about renovation of blockchain. If the innovation is radical, and there is a division of the chain, then this is a hard fork. If the innovations are not very significant, and the blockchain not divide into two chains, then this is a soft fork.
The concepts of hard and soft fork can be applied to Bitcoin, but altcoin is not.
Thus, altcoin is cryptocurrency, which is significantly different from other projects. For example, Dash, Ethereum, MaidSafe, NXT. In turn, it’s more correct to call “fork” such projects as Dogecoin (Litecoin platform), Expanse (Ethereum platform), Stellar (Ripple platform).
The table presents a comparison of two terms.
|Comparison parameters||Token (not cryptocurrency)||Fork (cryptocurrency)|
|Emission||Centralized, single||Decentralized, single or gradual|
|Value||Token hasn’t independent value, it gives the right to goods, services or privileges. For example, to vote in community or part of profit from the project.||Fork have the cost, it’s determined by demand and supply on the crypto exchanges.|
|Blockchain||There are no independent chains of blocks and wallets.||There are own blockchain and wallets.|
(Differences between token and fork)
Some tokens, for example, OmiseGO, are widely traded on exchanges and have a large capitalization. There is a protocol ERC 20 for quickly creating tokens on Ethereum platform. Thanks to this protocol, anyone can easily and quickly launch own tokens.
The drafting a full tree of cryptocurrencies would take too much time and would be useless with practical point of view. The origin of blockchain doesn’t matter for mining or trading. Algorithm of platform play important role for this actions.
The Bitcoin family includes more than 50 cryptocurrencies, separated from the parent chain Bitcoin (BTC). Some of them are presented in the table.
|Bitcoin Cash Plus||BRC|
|Bitcoin XT (Bitconnect)||BCC|
The following table shows some cryptocurrencies based on Ethereum platform.
There are more than 20 Ethereum hard forks, but most of them are not in demand. Let’s consider some hard forks of known cryptocurrencies.
|Litecoin (LTC)||Litecoin Cash (LCC)|
|Monero (XMR)||Monero V (XMV)|
|Ripple (XRP)||Stellar (XLM)|
|Zcash (ZEC)||Zclassic (ZCL)|
The goal of a good hard fork is to improve the blockchain. Few developers manage to introduce useful innovations for users. But those who do this contribute to the evolution of technology. Thanks to changes appeared smart contracts, multi-signatures, blockchains with increased block sizes, new encryption algorithms and many other promising developments.
Fork affect on volatility of the cryptocurrency course. If developers conducted a large advertising campaign, then a significant number of people will want to buy a new coin. They will simultaneously begin to exchange money through their wallets. The coin price will increase, and the cost of parent cryptocurrency will decrease. Then, traders will start to sell new currency, and its rate will fall. The exception is promising cryptocurrency, which traders will not want to sell in the near future.
Fork is important part of the cryptocurrency industry. They will remain important factor in development of the industry, as the teams of many projects engage in solving issues of scaling and confidentiality. Changes allow updating protocols as necessary that ensures promotion of the best ideas.