Bitcoin Gold, Bitcoin Cash, Bitcoin Diamond, Bitcoin What-Else-Do-You-Name-It. You may have heard all these names and wondered what do they have to do with Bitcoin itself. All these derivatives of the most popular cryptocurrency are in fact its forks.
In this article, we are going to explain what are the hard and the soft forks in cryptocurrencies and also answer some popular questions about them.
What are cryptocurrency forks
Due to the decentralized nature of public blockchains such as Bitcoin and Ethereum, there is no central authority to make decisions on the network development. Instead, such decisions are made by all the participants of the network.
If they come to the full consensus the data on the blockchain is verified and the blockchain itself continues to work the way it should. If some part of the community gets out of this consensus and creates a new version of the network protocol a fork occurs.
Why do forks happen
From a practical point of view, there are 3 main reasons why a blockchain fork can appear.
- To correct important security risks found in the older versions: Cryptocurrencies represent a totally new technology that develops so fast that it just gets out of control. As a result, many security breaches appear and it’s difficult to fix them all at once. You can compare the Bitcoin fork to the major software upgrade that resolves some critical bugs of the previous version.
- To add new functionality: Apart from fixing security bugs, every new upgrade of the software comes with a set of new features that make the new version better than the old one. Blockchain is an open-source technology which means that developers all over the world can participate in its development by sharing their ideas with the community. If the community supports the idea it is added to the next version.
- Reverse transactions: The security breaches in cryptocurrencies provide hackers with a bunch of tasty possibilities to improve their wealth at the expense of other users. If the community discovers the breach through which too many funds were stolen it can get to an agreement and reverse transactions that happened from a specified date. Such a thing is impossible in the real world where the stolen money can be immediately cashed out. The blockchain gives a ponderable benefit in this question.
The difference between hard and soft forks
Since the fork is simply an upgrade of the blockchain, it can be compatible or incompatible with its older versions. The forks divide into hard and soft ones according to this characteristic.
The changes that are incompatible with the older version of the blockchain require all participants to upgrade if they want to continue participating in the network. Those who don’t want to upgrade stay on the older version that continues to develop separately from the new one.
Examples of hard forks
- Bitcoin Cash: A part of the Bitcoin network participants wanted to increase the block size in order to speed up the transactions. So they performed a hard fork of the network on August 1st, 2017, that turned into a separate currency.
- Bitcoin Gold: The main goal behind creating this fork was to make Bitcoin mining profitable for end-users again. The hard fork took place on October 24, 2017.
- Litecoin: Charlie Lee, a former Google employee, released his own version of Bitcoin on October 7th, 2011. His main purpose was to make mining easier on consumer-grade hardware and to increase transaction speed.
- Ethereum Classic: After a huge hack of DAO (Decentralized Autonomous Organization) Ethereum’s creator Vitalik Buterin reversed the network to undo this fraudulent act. A part of the network participants didn’t agree with the changes and launched their own version on October 25th, 2016, justifying this act by the statement that the network can’t be changed. This new version was called Ethereum Classic since it followed the ‘classic rules’ of the immutable blockchain.
The updates of the blockchain don’t require from all the participants to upgrade. You may still follow the old rules and stay in one area with those who upgraded because the old rules are the part of the new ones.
Examples of soft forks
- Segregated Witness (SegWit): Initially designed to improve transaction speed and decrease fees on Bitcoin, it was later implement for other cryptos such as Litecoin, Vertcoin, Digibyte and a few more. First activated on August 24th, 2017, SegWit was adopted by only 10% in 2 months. By October 2018, this percentage grew up to 50%.
- Bitcoin Improvement Proposal (BIP): The mining software update accepted by 95% of miners in 2015 (mostly mining pools’ participants).
- Pay-to-Script Hash (P2SH). The update which allows sending bitcoins to a secured address without knowing how exactly this security is provided.
Who can create forks
Any developer with the necessary set of skills. All you need to do is to go to GitHub, get the open-source code of the coin you wish to fork and then implement the updates you deem necessary. This is the easy part.
The hard part is to get the support of the community. Miners, users and exchanges – you have to not only reach out to them all, but also persuade them to take your side and agree that these changes are needed. If your fork doesn’t get enough support it’s doomed to stay in obscurity.
How to make money on forks
Cryptocurrency hard forks give an opportunity to make money for those who hold some amount of a coin-to-be-forked on their wallets. Since all the transactions and the states of all wallets are available on the public ledger, the fork creators make a snapshot of the network on a specified date. Then they grant the new coins to those addresses that had at least some funds on that date.
Here’s a step-by-step guide on how to get Bitcoin forks for free:
- Make sure that your coins are located on the wallet where you control your private keys on the day of the network snapshot. This can be a desktop or a hardware wallet. The wallet addresses provided by exchange platforms do not work.
- After the snapshot, move your funds to another address but hold your private keys of the old one.
- Download the new wallet for the forked coin.
- Import your private keys from the wallet where the funds were located on the day of the snapshot.
- Typically, wallet developers provide instructions how to get forked coins with specifics that are relevant to this given wallet in the Help section.
Pros and cons of forks
The forks give some obvious advantages to cryptocurrency investors as they allow them to diversify their portfolio and get some coins for free.
On the other side, forks sometimes lead to a deep split between developers and miners of a given cryptocurrency. A good example of such a battle of interests is represented by SegWit2X (don’t confuse it with SegWit). This was a proposed hard fork of Bitcoin that aimed to perform some improvements on the network, but it led to such a disruption in the community that eventually was canceled.
Creating a fork of an existing cryptocurrency is much easier than to launch a new coin. You don’t have to invent the whole platform from scratch, you use the code that has already been created and tested by other people. Moreover, you can outreach to a formed community with your proposal and don’t have to go into the open field to search for the followers.
This is why the topic is not going to die down and in the future, we will surely see more forks of the popular cryptocurrencies.