What is blockchain?
As the name signifies, it’s the block of data that are chained together. The blocks contain progressive and sequentially ordered transactions. Each block in a network store information about the transaction (like date and time), Participants of the transaction and information that distinguishes each block from another block. A unique cryptographic hash code generated by a cryptographic hash algorithm, is included in each block to make it different from other blocks in the network.
The transaction in a specific network will identify with its native currency/tokens. There are blockchain protocols or guidelines that govern how transactions are confirmed and how many transactions are included in each block. These guidelines are encoded into the genesis block which is the first block of any blockchain network.
What is forking?
Forks indicate a change in the protocol. They happen the moment the underlying source code is changed to enhance certain features of a blockchain. In the beginning, there was just the bitcoin. It was designed to work as a decentralised digital cash system which can be used as an alternative to fiat currency. Soon after bitcoin, there were many cryptocurrencies that came into the market and most of them were the result of forking. There can be number of reasons to update the source code. They can be:
- Fix some security issues.
- Add some new functionalities
- Reverse some transactions
Soft fork and Hard Fork:
Soft forks are usually meant to keep a single chain. When the source code is changed, the old version stays on the network while users gradually update their systems. It is backward compatible.
Hard forks create permanent split of two chains that operate independently. It is not backward compatible, and users have a choice to decide which fork to use. In order to use the new protocol, the users must update their systems.
However, in terms of security and privacy, a hard fork is always preferred.
Popular Hard fork cases:
- Bitcoin cash– It happened in August 1, 2017. Bitcoin cash differed from original bitcoin by having higher transaction fees and was less decentralized. After the hard fork, bitcoin cash become a new cryptocurrency and every who had bitcoins before the hard fork received an equal amount of bitcoin cash as well.
- DAO– DAO was created as a smart contract on Ethereum network to operate like a venture capital fund. All ether holders could then exchange it for DAO tokens. However, on June 18th, 2016, the network was hacked and $3.6m ether were drained into a “child DAO” that had the same structure of DAO. In order to prevent this, most of the community voted for a hard fork. Full story can be read here https://www.coindesk.com/understanding-dao-hack-journalists
Types of Hard Fork:
- Planned Hard fork– Planned hard fork is an update that has been planned unanimously by the community and is etched out in the roadmap to enhance the features of the network. Such kind of update is well received by everyone and there is a consistent and coherent transition to the new network. Classic example is the planned launch of Ethereum 2.0 around December 1, 2020. The consensus mechanism in Ethereum 2.0 is being changed from proof of work to Proof of stake to improve scalability.
- Contentious Hard fork – Contentious Hard fork occur due to disagreement withing the community and can lead to vexatious events. Often parties in disagreement opt to create a new chain by changing the source code to bring in new enhancements. The new chain thus created will also have a new cryptocurrency for the supporting nodes. These events can also be seen to highlight the diversity in crypto world that brings in innovation. The decentralised nature of the cryptocurrency gives the power of authority to the users to decide which chain to choose.
- Spin off coins– The code base of the cryptocurrencies is open source. This means that anyone can alter the code and create a new coin with different characteristics. Litecoin was created from hard forking Bitcoin. The creator of Litecoin changed the consensus algorithm from SHA256 to Scrypt, which reduced the block time from 10 to 2.5 minutes. Spin off coins can be created by anyone.
Effects of Hard Forks on Crypto market:
When a hard fork happens, holders of the parent cryptocurrency are airdropped equal amount of new forked off coins. For example, if a person holds 10 bitcoin cash, after the forking, he will be airdropped 10 more BCH ABC. If this event is a planned one and is known to everybody, it provides strong opportunities for the large trader and investors (known as whales and dolphins) to increase their stake in the parent token. They begin to buy every available token thus artificially increasing the price of the parent tokens. After the split, the whales are rewarded with equal number of new tokens. The whales know that the price has been artificially increased due to their actions. Hence, after the split, they tend to dump both the old and new tokens. This causes a crash in the price of both the parent as well as the new tokens.
In this month we saw contentious hard fork in Bitcoin. On August 18, 2020, Bitcoin cash’s development team announced a new feature called infrastructure funding plan (IFP). According to IFP, approximately 8% of the Coinbase reward will be set aside for Bitcoin cash ABC infrastructure development. Despite the planned enhancement and the announcements, Bitcoin cash lost considerable support. It got more diversified when the development team also tried to include Jonathan Toomim’s ASERT difficulty adjustment algorithm (DAA). The split finally occurred on November 15, 2020 leading to two networks – Bitcoin Cash ABC (BCH ABC) and Bitcoin cash node (BCHN).
However, at the time of press release, BCH ABC had not received any hash power. This could mean that BCHN will likely become the dominant fork. (Coin.dance)
Bitcoin was unarguably the strongest cryptocurrency in the market. Over time it got split into bitcoin and bitcoin cash. Many other hard forks followed this initial split. For quite some time, Bitcoin cash had become a brand name and creating hard forks would mean handing over some the brand name to another fork. For a common man, who hardly understands blockchain, how difficult it would be for him to understand the difference between bitcoin cash ABC and bitcoin cash node.
Will Crypto Hard fork continue even as the Crypto Market matures?
Forks are inevitable even as the Crypto Market matures because innovation has no end. Every new innovation brings in a new hard fork! It might even be unintentional as was seen with Ethereum’s hard fork a week ago which was due to a minor bug fix. Hard forks might bring in some chaos and instability, but it also brings in a new dimensionality in this “yet to be explored” crypto industry!