What is a Fork?
Besides decentralisation, another crucial aspect of the technology is it being open-source; this allows anyone to view and contribute to the blockchain code, occasionally leading to something known as a fork.
Forks, depending on their kind, have the potential to take a blockchain in a completely new direction.
What forks are, what are their types, who initiates them, as well as what their history is in terms of Bitcoin are all questions that will be covered in this article. If you are interested in learning more, be sure to keep reading.
What is a blockchain fork?
A blockchain is made up of blocks that record data about transactions which are yet to be validated. Once the transactions are validated, the block is closed and linked to the previous one, forming a chain of blocks.
So, what does it mean when a blockchain goes through a fork?
A fork is the division of the blockchain into several branches giving it the shape of a fork or a tree. Each branch is valid, and it's up to the blockchain miners to decide which branch they will continue using.
Any blockchain protocol can be forked as many times as necessary.
Forks may occur for several reasons: adding new features, improving the blockchain, or making it more secure. In other words, if you want to change the rules of a blockchain protocol, such as the maximum block size, the block time, or even the consensus algorithm, you must perform a fork and change the blockchain source code.
In less common cases, forks can also be used to create completely new coins and ecosystems.
Types of blockchain forks
Forks, be it the ones initiated to implement small updates or create new ecosystems, are called intentional forks.
We divide intentional forks into two categories:
- Soft fork - This is a simple update that is applicable to the history of the blockchain without modifying the blockchain fundamentally. A soft fork does not require nodes to be upgraded and allows them to still be transaction validators. If the soft fork is accepted by all users, it will become the new set of rules for a blockchain protocol.
- Hard fork - This is a more substantial and deep modification of the blockchain that is not backwards compatible. Any node that does not upgrade to the new version can no longer use the blockchain. In situations when accepting the new version was not a unanimous decision, a split occurs, resulting in two blockchains that use a variant of the same software.
Accidental forks are created when thousands of miners are in competition to create a new block.
You see, if two miners finish creating a block at the same time, there might be disagreement within the blockchain network on which block is the new one. This, in turn, leads to the creation of a new chain of blocks - an accidental fork. Luckily, these forks resolve themselves as the network chooses to continue working on the longer chain and sync with it, leaving the other chain to die out or, as some like to say, "get orphaned".
Who initiates a fork?
As a blockchain can have a massive amount of users, the question of who initiates a fork arises.
To answer this without diving too deep into the governance of blockchains, we can say that anyone from a plain node user to a miner or developer has the right to initiate a fork.
That being said, it's important to note that periods of increased price volatility are common with forks, so anyone deciding to fork a blockchain should keep that in mind.
The forks of Bitcoin
Now that we have the ins and outs of blockchain forks covered, it's time to talk about the forks implemented on the blockchain of the most famous cryptocurrency - Bitcoin.
Since its genesis block, Bitcoin has passed through many soft and hard forks. All of them were intended to either address a potential problem of the initial protocol (e.g. the size of blocks to reduce costs and increase the number of transactions per second) or to improve the decentralisation and the profitability of the mining.
The hard forks of Bitcoin have led to the emergence of many cryptocurrencies, with the most notable being:
- Bitcoin Cash
- Bitcoin Gold
- Bitcoin Diamond
- Super Bitcoin
- Bitcoin Atom
- Bitcoin God
- Bitcoin Private
- Bitcoin Zero
- Bitcoin Post-Quantum
Out of the hard forks listed above, Bitcoin Cash and Bitcoin Gold have garnered a lot of attention and popularity.
Aimed at solving the lag and transaction delay Bitcoin was facing, Bitcoin Cash is a hard fork that occurred on August 1, 2017. It's characterised by larger blocks that can hold more data as well as faster buying and selling. Thanks to the larger blocks, Bitcoin Cash is also easier to scale.
Bitcoin Cash has a market capitalisation of $2,019,429,506 as of July 2022.
Bitcoin Gold, a hard fork that also occurred in 2017, just a few months after Bitcoin Cash, had the aim of making Bitcoin mining a process that requires fewer resources and is thus more accessible.
Bitcoin Gold mining is done using standard GPUs, while traditional Bitcoin mining requires expensive hardware developed exclusively for that purpose.
Put simply, you can view Bitcoin Gold as an attempt to increase the independence and decentralisation of the original Bitcoin concept.
As of July 2022, Bitcoin Gold has a market capitalisation of $274,902,774.
What impact do forks have on Bitcoin and its market capitalisation?
When a hard fork is performed, holders of the original currency will receive both the tokens of the new protocol and the old one. So, if you had 1 Bitcoin at the time the Bitcoin Cash fork happened, you received 1 Bitcoin and 1 Bitcoin Cash.
With that said, we should highlight that during a fork, we enter into a speculative phase for the price of both cryptocurrencies. Indeed, if there is no consensus, investors and miners are split between the two existing projects according to the convictions and interests of the two communities. This means that, for Bitcoin or any other project, hard forks could be seen as a long-term threat as they cause part of the market capitalisation to be distributed across the other altcoins created by the forks.
You can see the evolution of the market capitalisation share of Bitcoin in relation to the total market capitalisation (Bitcoin plus its forks) below:
For the time being, Bitcoin forks have not affected Bitcoin's market capitalisation even with all the apparent technological improvements. Today, the forks correspond to only 5% of the entire Bitcoin tree and less than 3.5% of the total market capitalisation.
If we were to assume one thing from this, it would be that despite there never being so many alternative projects, Bitcoin has never been so strong in relation to them.
Blockchain forks conclusion
It is not impossible to one day see a Bitcoin hard fork take over the core project. But, currently and probably for the foreseeable future, Bitcoin remains the crypto king thanks to its age, strong community, visibility, unmatched security, and improvements made through soft forks or subsidiary development.
Still, this does not dismiss the value of other projects that serve as alternatives and continue to contribute to the growth of the ecosystem.
Forks, whether soft or hard, allow for the development and diversification of a booming technology. Far from being threats, they are a sign of the vitality of a blockchain and are worth your attention.