Have you ever wondered how Bitcoin cash came out of Bitcoin or what is different between Ethereum and Ethereum classic?
One word answer for these questions is Forking of their blockchain.
However, knowing this is not enough. Even though the Forking concept is much discussed and seen frequently, it often gets misunderstood. But now it is high time to understand the context behind forking crypto clearly to stay on the right track of your crypto investment and avoid the wrong investments.
A good understanding of forking will strengthen your crypto knowledge and help you to take advantage of the sudden occurrences in your favourite crypto blockchain.
So, let's begin!
What is Forking?
Forking crypto means splitting a blockchain network in a new direction to improve and change it from its existing version.
As we know, there exists a strong community of developers behind every cryptocurrency. Even though this crypto community is the biggest supporter of a cryptocurrency, the community generates multiple opinions about that currency's future. As a result, when one section of the community suggests some changes in the cryptocurrency and the other disagrees with it, their disagreement leads to a Forking.
For example, two friends, A and B, want to go to location X. They start the journey for X together, but after some time, A suggests route 1 to reach X while B offers route 2 to reach X. Both try to convince each other, but they could not agree. At last, A went to route 1, and B went on route 2 to reach X. This act of A and B splitting from each other creates a forking of the routes. The same concept applies to the forking of a blockchain.
When two groups of developers disagree over their different opinions about the future of a blockchain, one group splits from the existing group of blockchain developers and creates a new blockchain or cryptocurrency. This action is called "Forking crypto".
How does the Forking work?
Forking works by bringing changes to the existing blockchain to generate a new cryptocurrency. Either developers create the new cryptocurrency from scratch by copy-pasting the codes and making the required changes, or they split the existing blockchain. In simple words, a Forking takes place either by making changes in the consensus mechanism of a blockchain or by making changes in its software. In both ways, a diversion generates that indicates the change made in the blockchain.
But both these ways require some support from the mining community of that cryptocurrency.
What are the types of crypto Forking?
Depending on the nature of change for creating a new fork, there are two types of Forking- Hard Forking & Soft Forking.
Hard Forking
It means making radical changes in the network protocols to the extent that the new version will become incompatible with the old one. This situation creates two branches of the network blockchain, the previous version that follows the old protocols and the new version that follows the new protocols. Both versions will work separately, and no direct correlation will exist between them. Hard forking is a point where a permanent divergence occurs in the blockchain, and a completely new cryptocurrency generates to follow the new rules.
The most common example of a Hard Fork in history is Bitcoin Cash (BCH). It developed from the Bitcoin blockchain on the 1st of August 2017. The fork occurred as a scaling solution for the Bitcoin blockchain to increase its transaction capacity by increasing the block size. But this change did not get the unanimous consent of Bitcoin developers, and a Bitcoin Fork called "Bitcoin cash (BCH)" was created. This currency shares the same history as the old one (Bitcoin) until the split and becomes independently transacted afterwards. All holders of Bitcoin (BTC) received the same amount of Bitcoin Cash at the time of forking to initiate the transactions in the new protocols.
Another popular example of a hard fork is Ethereum's DAO (Decentralised Autonomous Organisation) fork. It responded to the DAO attack on Ethereum in 2016 when the Ethereum blockchain lost 3.6 million ETH in a hack. A part of the Ethereum community suggested a fork to recover the lost ETH and got over 85% votes. However, some miners refused to adopt the proposed changes and stayed on the original version of the ledger. These miners renamed the origins ledger to "Ethereum Classic".
Soft Forking
While a hard fork is not backwards compatible, a Soft fork is. It means that, unlike a Hard fork where the new version does not accept the old version protocols, a Soft fork does accept the rules of its old version. The new Soft Forking rules co-exist with the old existing rules of the blockchain. However, the new blocks will be mined based on the new regulations. We can say that a soft fork is more like a software update of a blockchain that adds new features and functions to an existing blockchain. Since there does not exist more than one blockchain in the end, the latest changes are compatible with the pre-fork blocks.
An example of a Soft fork is the Segregated Witness (SegWit) fork of Bitcoin, which was a protocol update to change the structure of the Bitcoin transaction data. It was a technological feature added to the Bitcoin blockchain in August 2017 to increase its transaction speed without increasing the block size. Interestingly, the bitcoin price hiked almost 50% in one week after the activation of SegWit.
Another trendy example of Sofy Fork can be the awaited update of the Ethereum blockchain that will shift its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS).
Hard Fork v/s Soft Fork: Which One is Better?
While both Hard fork and Soft fork come with their benefits, their drawbacks act as the deciding factor between them.
Soft forks seem like a better choice than Hard forks because it does not require a separate blockchain. But since both new and old versions of the update work simultaneously in soft forks, they can be easily manipulated by bad actors for their benefit.
On the other hand, Hard forks that enhance the security of a blockchain network do not perform well in most cases. Almost all hard forks developed till now hold negligible value compared to their original counterparts. Moreover, they divide the blockchain community to weaken the overall blockchain network.
How does a fork affect the price of cryptocurrency?
Forking has always been very controversial. It can affect the price of a cryptocurrency dramatically. Since forks improve a blockchain, they bring the required update to the network of cryptocurrencies. Sometimes, they increase the transaction speed of a blockchain network, while in some cases, they add value to the original cryptocurrency. For example, Ethereum (ETH), a fork of the Ethereum blockchain, has become the biggest altcoin but the Ethereum Classic (ETC) has a long way ahead. This example of Ethereum is also a great way to understand how important it can be to keep an eye on the forking of cryptocurrencies. The effects of forking on the price of cryptocurrency depend on the acceptance level of its community and developers. Factors like future requirements, market scenarios, and global reactions also play a significant role in the price change of a cryptocurrency after forking.
Is there any new Forking crypto on the way?
After a shocking TerraUSD and LUNA crash, the founder of Terra Labs, Do Kwon, proposed a Forking of Terra network as the recovery plan for LUNA. If his proposal gets the majority votes, we can expect a forking of the Terra network in the upcoming days.
