From the outset, Bitcoin existed in a lone world of its own as Satoshi Nagatomo designed it to function as a decentralized digital substitute for cash. As the times passed and more people saw the numerous advantages embedded in digital currencies, more coins developed and introduced to the market.
These new currencies didn’t appear out of the blues, they came into existence as a result of a fork.
In the cryptocurrency space, it is common for investors not to have heard of the term fork or even so – hard fork as the case may be.
What comes to your mind when you hear fork or to makes matters worse, imagine your financial adviser going on to talk about a hardfork in an effort to educate you about coins.
Well, it is not what you think as these terms clearly mean something different in the digital investment world. Forks and hard forks? Let’s find out what they mean.
What is a Fork?
While every audio of this word sounds strange, it isn’t a cutlery either. It’s common to find the price of cryptocurrency becoming very volatile and this process where everything becomes wild is called fork.
Sometimes, this wild-word can have a positive connotation or sometimes, it can go the other way. No matter which way it turns money could still be made when you play smart.
Investors who have been in the crypto space for a while must have experienced a couple of fork events.
Fork or forking as the case may be occurs when the user base or developers decide that something essential needs to change about a cryptocurrency. This could be as a result of a major hack or glitch as witnessed with Ethereum or a key disagreement within the Bitcoin and Bitcoin Cash community.
Basically, a fork occurs when a deviating network begins to produce and maintain a chain of blocks that deviates from the original, creating another version of the coin essentially with its own distinct market value, rules and blockchain.
Simply put, Fork is just a nice name for a protocol or software update. It creates an alternative version of the crypto and leaves both to run simultaneously on different aspects of the network depending on the particular fork in motion.
In the cryptocurrency space, there are basically two types of fork. There is the Soft Fork and the Hardfork.
Soft Forks are also known as backward compatible forks and they are optional. Their counterpart i.e. hard forks are not backward compatible, this means they must be applied mandatorily.
Hard Forks in Cryptocurrencies
Any change in protocol or software upgrade that relegates the old rules and generates a new set of codes is called a hard fork. This type of fork is permanent and it mandates all nodes and users to upgrade to the newest version of software or protocol. The hardfork isn’t backward compatible.
After a Hardfork, the previous version and the new split up, leaving no communication or transaction option between the two. In most cases the new version takes up all the past transactions but from that moment, each version will have its own transaction history.
A perfect example of a hard fork is the one that occurred within the Bitcoin community. Bitcoin Cash was the hard fork meant to create two different assets with varying values.
After the fork had occurred, Bitcoin Cash and Bitcoin became two absolutely different crypto from the moment the process was complete. You can’t send Bitcoin Blockchain to Bitcoin Cash or vice versa because the chains are not compatible.
It is important to however understand that every hard fork isn’t meant to create a new coin with value.
Why does a Fork Happen?
There are many reasons why Forks happen but the most common reason is the split of communities due to the implementation of new features.
In most cases however, it happens due to the split of a community. Hardfork can be however described as a kind of divergence where the community decides they would not follow the old protocol and rules anymore on the same blockchain.
Impact of a Fork on a cryptocurrency
A fork can have a substantial impact on a cryptocurrency. These impacts are often evident via a big fluctuation in prices and a lot of controversies have surrounded them in the past.
A notable majority of the community needs to agree before the fundamental changes can be achieved.
In the case of a successful upgrade, a new coin will come out of the Blockchain. While you can also say that the new coin “forks off”, both coins become separate ledgers originating from the same blockchain.
The effects of a Hard Fork can be profound due to the uncertainty it causes. The Bitcoin cash Hard Fork is a perfect example of how things shape up.
Holders of the original cryptocurrency mostly end up with an even number of forked off coins.
For instance, if a user had 5 Bitcoin at the time the Bitcoin cash occurred, they would also have 5 Bitcoin cash. This often leads to some really interesting times within the market.
In cases of Hardforks like Bitcoin Cash, the two separate coins and blockchain will run simultaneously after the fork. In some cases where hard forks have occurred, the following are the outcomes.
One blockchain may become dominant leaving the other blockchain with a low community value and adoption.
The other scenario is for both blockchain to witness a noteful level of adoption. The new and the old coin co-exist and operate independently with almost even community adoption aswell as value.
How often do forks happen?
Basically anyone can fork whenever they choose. This means that forks can happen all the time. While some forks are a mere activity in the market, others are genuine attempts to make a coin better and some are outright fraudulent attempts.
The Bitcoin Platinum fork was gaining a lot of ground in the market till it was discovered to be a hobby scam by a teenager in South Korea.