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What Are Cryptocurrency Forks and How do they Work?

Crypto forks explained

Cryptocurrency forks are protocol changes in a blockchain. Cryptocurrency may or may not be backward compatible. 

Therefore, there are two main types of cryptocurrency forks: hard forks and soft forks.

Since most cryptocurrencies are open-source (meaning that anyone can access or modify), anyone can apply their own protocol changes. However, for a cryptocurrency to fork, the majority of other nodes need to agree with these changes.

Just like many other cryptocurrencies, Bitcoin – the world’s first cryptocurrency – has also undergone protocol changes or forks. 

So to understand Bitcoin forks, you need to briefly know how cryptocurrency forks occur.

Hard Forks

Hard Forks are protocol changes that are not backward compatible, which means that once the blockchain is updated, it cannot go back to a previous update, and the nodes that are not updated are not valid.

Once this change in a blockchain protocol occurs, the nodes need to update the information to the new rules in order to continue valid mining

However, if a relatively large portion of a cryptocurrency community decides that they do not want to apply the new changed protocols but rather stick with the older version, then the two versions will be divided into two separate cryptocurrencies and continue to operate independently.

Hence, this type of cryptocurrency fork is known as a hard fork.

Soft Forks

Soft Forks, on the other hand, are protocol changes that are backward compatible, meaning that even if nodes are not updated based on the new protocols from the cryptocurrency’s developer, they can still do valid mining in that blockchain.

Compared to hard forks, the likelihood of a cryptocurrency splitting after soft forks is very low. 

Client Software Forks

The first Bitcoin fork happened in 2011 and formed Litecoin. Litecoin was intended to have a lower block generation time, increase the maximum supply, and so on. However, some do not consider Litecoin as a proper Bitcoin fork, but rather as simply a new cryptocurrency that followed Bitcoin’s blueprints.

The first prominent Bitcoin fork was Bitcoin XT, and its upgrade included an increased block size which doubled every two years. However, it was not very successful.

After Bitcoin XT, Bitcoin forked to Bitcoin Classic, which also included a larger block size, but not as big as Bitcoin XT. It also failed later on.

Next came Bitcoin Unlimited, which was a combination of the two previous forks, but its supply was unlimited. 

What are the Bitcoin Hard Forks?

Bitcoin Gold is a Bitcoin hard fork, which focuses on more decentralization. This is because more powerful miners in the Bitcoin blockchain have a bigger chance to mine than smaller ones. Hence, Bitcoin Gold wants to resolve that.

Bitcoin Cash is the most successful Bitcoin fork so far. It emphasizes its preventions on replay attacks, it has a bigger block size, and it promotes more efficient “electronic cash” transactions.

Bitcoin Cash price throughout the years. Source: Coinmarketcap

Bitcoin Cash price throughout the years. Source: coinmarketcap

Bitcoin SV is a result of a Bitcoin Cash split, and it is owned by Craig Wright, an Australian computer scientist who claims to be Satoshi Nakamoto.

Takeaways

  • Hard forks and soft forks are protocol changes within a cryptocurrency.
  • Hard forks are not backward compatible and can result in cryptocurrency splitting.
  • Soft forks are backward compatible.
  • Bitcoin has forked several times throughout the years.
  • Some of the most important Bitcoin forks are Bitcoin Cash, Bitcoin Gold, Bitcoin SV, etc.

 

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