The world of finance today is not what it looks like before the market crash of 2008. It was because of the crash that gave birth to a new order of finance — the new order of cryptocurrencies. Bitcoin broke barriers and introduced a new way of thinking from the traditional ways of transacting business and exchanging cash. Bitcoin was the first cryptocurrency that took the world by storm. Since then, countless altcoins came to the fore to make a name for themselves. As many altcoins came from out of the blue, some were the result of forks. Reasons for forks to occur differ. Developers needed to upgrade the network. A debilitating hack just happened. Or there was a major disagreement within the token community. Forks can cause controversies and affect market prices especially the cryptocurrency in question.
And so, what is a cryptocurrency fork?
To simplify, a fork can either be an upgrade or a breakaway, a change that is introduced into the blockchain’s protocol used by the software in validating transactions. There are two breeds to these — soft forks and hard forks.
A soft fork is a backward compatible sort of change that allows older nodes or connected computers to continue recognizing as valid new transactions coming in. Only that any mined blocks will be invalidated by the updated nodes. Soft forks need the majority hash power of the network in order to be successful or they end up becoming the smallest chain and turning into a hard fork.
A hard fork this time is the change which breaks the backward compatibility. The nodes that are running on the old software will recognize new transactions as invalid. They will have to update if they wish to mine new valid chains. If a big chunk of the community still wants to continue with the old rules, that is the time the chain will have to split and would result in two different currencies. A consensus of coin holders is needed to induce a hard fork. Adoption of the hard fork requires a substantial number of nodes updating to the latest version of the software protocol that will allow them the use of the new blockchain and the coin. Any node that does not update will have no way of using the new coin and blockchain.
A hard fork is any change that breaks backward compatibility. Nodes running the old software will see any new transactions as invalid. This means that in order to mine new “valid” chains, they will need to update. If a large enough percentage of the community decides that they want to continue using the old rules, then the chain will split, resulting in two separate currencies. A hard fork requires majority support (or consensus) from coin holders with a connection to the coin network. In order for a hard fork to be adopted, a sufficient number of nodes need to update to the newest version of the protocol software. This allows them to use the new coin and blockchain. Any nodes that chose not to update will be unable to use the new blockchain. If the intended hard fork fails to reach a consensus, breaking the blockchain can occur.
Miner-activated updates are sometimes used for soft forks, wherein the hash power of the new protocol must match a percentage rating before adopting the update. it always goes back to the community agreeing to any change in the blockchain and consenting to a method before it is implemented, or a hard break can result. Masternodes are what Dash uses to adopt changes in their blockchain platform.
A successful upgrade can be seen with a new coin forking off from the block where the upgrade happened. There will be two separate coins with their own separate ledgers coming from the same blockchain. Segwit is an update where all nodes join the update to the new protocol leading to only one coin existing. Bitcoin and Bitcoin Cash is a case of hard fork where two separate coins and ledgers are running simultaneously after the fork.
Two things can result after a hard fork
- A blockchain becomes dominant over the other blockchain receiving low adoption and value. One example is Ethereum crushing Ethereum Classic.
- Neither blockchains are dominant but equally adopted, they co-exist, and operate apart from each other; equal in community adoption and value. An example is Bitcoin and Bitcoin Cash.
Forks can divide a community. Traders and miners have to make a choice between two competing visions of a cryptocurrency’s future. The disruptive experience often leads to separation, with bitter feelings that linger. Bitcoin and Bitcoin Cash is the same prime example.
It can also be that because of this disruption, a fork cannot take place. Take the case of the SegWit 2.X which failed to materialize in 2017 because a consensus was not sufficiently achieved for a clean blocksize upgrade. Without total agreement among all nodes, another hard fork is highly probable enough to shake the foundations of Bitcoin. Contending parties conceded not to push through.
Hard forks make the cryptocurrency unstable. The market becomes volatile and the community is divided. Your decision rests on the stakes you have on the coin and the fork you are leaning to. Whatever currency you have will be the same number you will have on the hard fork, considered a free currency. You may even increase your investment. But if you cannot react quickly to a sell-off like whales can do, it is better that you dispose of your investment before the fork event.
Soft forks are usual upgrades to the functionality and security of the blockchain protocol. You may take advantage of market fluctuations in raising your stakes. But if you think that the fork is not looking good for the cryptocurrency, it is best to sell before the price crash. There is also the chance that the community might be divided if they do not support the fork.
Cryptocurrencies sooner or later will experience these kinds of forks. You should already know the facts that the crypto market is of a highly volatile one. Any news on hard forks or soft forks can really rattle values. You need to prepare yourself for the worst. Again, be advised not to put all your eggs in one nest.
Get it right the first time with your digital investments. Wallex is a FinTech company that employs strategic blockchain solutions to your needs such as Trust, Custody, Exchange, Transfer, and Asset Management. Make Wallex your partner as you enter into the new normal of things. You will be glad you did. Call us now. The line is open 24/7. https://wallextrust.com