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What is a cryptocurrency fork and the effects it generates
What is a cryptocurrency fork and the effects it generates
Crypto

What is a cryptocurrency fork and the effects it generates

By Michele Porta - 27 Jul 2019

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As explained in the article of the new neologisms born with the advent of cryptocurrencies, even the word fork has taken on a very different meaning and at the same time very important in the blockchain space.

Fork: What is it?

In order to implement an update in Bitcoin’s main software, for example, a BIP is required.

BIP stands for Bitcoin Improvement Proposal. It is a proposal aimed at updating part of the Bitcoin code that may concern the protocol itself or its documentation.

Bitcoin Core, the team that manages the Bitcoin client, has the power to review the proposal with the community. If the proposal is accepted, the code can be transferred to the next version of the Bitcoin Core client.

Following the upgrade, both nodes and miners can decide whether or not to upgrade their software to the newly released version. Many of the changes are not fundamental and therefore do not require users to update their software continuously.

However, some changes are so significant that they require changing the client to allow the system to work properly. In this case, a fork is necessary.

The term fork, therefore, means a modification of the original code, the purpose of which is to improve a digital currency. This allows a new version of the blockchain to be generated while maintaining the entire antecedent story.

This mechanism has allowed the birth of new coins with different characteristics from the original cryptocurrency. A historical example is the Bitcoin fork that took place on August 1st, 2017 from which Bitcoin Cash was born.

Hard vs Soft fork

 

what is a cryptocurrency fork

A distinction must be made between two types of forks: hard and soft.

In simple terms, hard fork refers to a split without backward compatibility with the previous blockchain. This implies a clear division of the two source codes and there will be no exchange of data between the two blockchains.

In contrast, the term soft fork is used to define a lighter split in order to maintain backward compatibility with the previous blockchain. In this case, outdated nodes will still be able to process transactions and add blocks to the blockchain provided they do not break the rules imposed in the new protocol.

Pros and cons

When it comes to hard forks there is often a lot of interest from the cryptocurrency community because a new project is being created with the aim of improving or modifying the previous technology.

The main objective is often to improve the speed of transactions.

Usually, in the phases preceding a hard fork, there is a sudden increase in the value of the parent currency, as many investors are trying to take advantage of the opportunity that each hard fork offers free coins that are generated when the new child currency is created.

In fact, anyone who owned bitcoin (BTC) before August 1st, 2017, for example, found themselves in possession of the same amount of bitcoin cash (BCH) without having to buy it.

This can, therefore, be considered in all respects a pro, but it is possible to easily guess the other side of the coin: speculation. It is not uncommon, in fact, to see the price of the original currency fall drastically once the fork is completed.

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