Forks in the Bitcoin network occur when different users have differing views on the history of transactions. These divisions result in new forms of Bitcoin currency and therefore are inevitable due to the decentralized nature of the blockchain system.
As a result of these splits, cryptocurrency investors now have a choice of purchasing options. Forks come in a wide variety of shapes and sizes, and some have held their value better than others over time.
Forks are a complex topic, but the simplest way to make sense of them is that they create a bunch of rules for the Bitcoin protocol to adhere to. As a result of introducing a new rule, Bitcoin blockchain miners can now select between two sets of rules, much like a fork in the road.
For the most part, these splits result from differing viewpoints on the history of transactions, which is possible as a result of system delays. As Bitcoin grew in popularity, so did the blockchain technology on which it was founded. As a result, the system as a whole became unreliable, with higher transaction fees.
Bitcoin was forced to develop a scaling solution as the number of people buying and selling the commodity increased due to this slowness. That’s when the forks were brought out to play.
Because of forks, the Bitcoin platform can be restructured and experimented with while maintaining the integrity of the original product. The first version of Bitcoin was built upon 1-megabyte blocks, which proved too small as the cryptocurrency grew in popularity. While creating a new currency, the network can fork on larger blocks.
Types of Forks
1. Hard Forks
Cryptocurrencies that have undergone “hard forks” have new versions that are a total break from the previous version. Immediately following a hard fork, there are no activities or contacts between the two versions of Bitcoin any longer. Change has occurred, but they are not connected in any way.
2. Soft Forks
Rather than affecting the final result, a soft fork modifies the Bitcoin protocol. When comparing a soft fork to a hard fork, it’s important to note that the former is backward-compatible with the latter.
As a result, old nodes in the system will be able to recognize the new protocol. Moreover, it signifies that no new product will be introduced.
Some people compare forks to organizational splits, with one branch moving in a particular way while the other branches move completely differently. In the case of Bitcoin, everything happened the same way.
These cryptocurrencies are part of the Bitcoin family, yet they operate separately and follow different regulations. Although they’re all cryptocurrencies, they aren’t the same as the first Bitcoin.
Major Bitcoin Hard Forks
Bitcoin Cash & Bitcoin Gold are the two most popular hard forks, but there are others.
1. Bitcoin Gold
In October 2017, a new hard fork called Bitcoin Gold was created to render Bitcoin mining more egalitarian by requiring only the most basic equipment. Rather than using ASICs (application-specific integrated circuits), which are more expensive and only available to a few large players, it is mined using conventional graphics processing units.
The goal was to strengthen the original Bitcoin’s independence and decentralization.
2. Bitcoin Cash
On August 1, 2017, Bitcoin hard forked into Bitcoin Cash. It was created to address some of the issues with Bitcoin’s latency and delayed transactions. It does this by switching from the original Bitcoin’s 1-megabyte blocks to 8-megabyte blocks, making it simpler to grow as more people use the service.
Other Bitcoin Hard Forks
Here are a few of the other hard forks and when they started:
- Bitcoin Diamond: November 2017
- Super Bitcoin: December 2017
- Bitcoin Atom: January 2018
- Bitcore: November 2017
- Bitcoin God: December 2017
- Bitcoin Private: January 2018
- Bitcoin Zeo: September 2018
- Bitcoin Post-Quantum: December 2018
What is the Significance of Bitcoin Forks for Traders?
Many traders look for clues to the future direction of the bitcoin price in the news about software forks. If the network can handle more transactions per second or uses less energy, adoption might increase, and the value of bitcoin could skyrocket as a result.
Alternatively, if the network cannot agree on a popular update or a hard fork happens, the price of bitcoin may decline since the demand for a new cryptocurrency may be reduced.