What is a Fork in Crypto?

A fork is not merely a utensil that you can use to serve yourself some delicious food. It actually has a meaning that is entirely its own in the crypto world. We want to take a closer look at this specific term, what it means, and why it is important when you are trading cryptocurrencies.

What is a Fork?

All cryptocurrencies are traded on extremely long open-source networks known as blockchains. These are blocks of data that detail every transaction that has ever occurred in any given cryptocurrency. Given their nature as open-source programs, it is necessary for blockchains to be maintained by an army of volunteers throughout the world. Communities form around specific currencies, and there is no shortage of people who are willing to part with some of their time in order to maintain the blockchain of a currency that they believe in.

Coinbase explains what it means when a blockchain has a fork:

A fork happens whenever a community makes a change to the blockchain’s protocol or basic set of rules. When this happens, the chain splits — producing a second blockchain that shares all of its history with the original, but is headed off in a new direction.

It is necessary at times for a team of developers to change some of the underlying rules that apply to the currency they are working on. These changes are meant to make the currency more durable and stable for all buyers and sellers. However, there are also cases when a fork may be used to create an entirely new cryptocurrency. Thus, we must examine the difference between a soft fork and a hard fork.

Soft Forks

A soft fork is the more common type of fork in any blockchain. It occurs when the community agrees upon a new set of rules that will apply to a specific cryptocurrency. It is a software upgrade that may allow for more functionality within the currency, or at least make it more secure and protected from outside forces. Either way, a soft fork upgrade is a separate branch of the blockchain for that currency.

However, as previously noted, this branch will still extend back to the original start of the blockchain and keep a continuous record of all transactions that have occurred. This is completely necessary to ensure the integrity of the blockchain and the currency that it represents.

Hard Forks

There are some cases when a change to the set of standards for the currency is so dramatic that it simply cannot be made backward compatible with the previous set of rules that had been established. When this is the situation, a hard fork has formed.

When a hard fork occurs, the new set of rules will apply to a brand-new currency. The old set of rules will continue to govern the old currency. The two have split apart from each other, and there is simply no way to reconcile the changes. This just means that yet another cryptocurrency is available for traders and speculators to get involved with if they choose to do so.

Famous Forks in Crypto History

There have been several crypto hard forks throughout the history of digital currencies, but we want to look at some of the most famous ones to get an idea about what they look like and how they play out.

Bitcoin Cash

The very first Bitcoin hard fork occurred on August 1, 2017 when developers could not come to an agreement over the technical requirements necessary to increase the transaction limits that were currently in place with Bitcoin. Jihan Wu, Craig Wright, and Roger Ver, developers who believe in the philosophy that was eventually adopted by Bitcoin Cash, suggested that the best way to increase the limits was to increase the size of a block. They said that this would make transactions faster and cheaper. They concede the fact that this all raises the cost of storage at the same time.

Those on the opposite side of the argument believed in making blocks smaller and allow small transactions to be handled by third-party providers. The two sides could not come to any sort of agreement, and a hard fork was created which allowed Bitcoin Cash to spin off from Bitcoin itself.

Bitcoin Gold

It didn’t take long after the first hard fork for another one to take place. In this case, the Bitcoin Gold hard fork began on October 24, 2017. In this situation, the differences related to how the algorithm behind these cryptocurrencies work. The Bitcoin Gold algorithm does not favor larger mining operations in how it distributes Bitcoin Gold earned from mining. The original Bitcoin currency does still favor larger mining operations because the complexity of the problems that are involved require entire warehouses of computers to solve.

Bitcoin Gold uses an Equihash-BTG algorithm which does not favor those with specialized equipment. Instead, all are welcome to try to mine Bitcoin Gold and receive their reward equally.

Why You Might Invest in a Crypto Fork

Novices to the crypto world are often curious about why they might want to invest in a crypto fork when they can put their money to work in the original cryptocurrency. There are actually a few reasons why people consider these as potentially ideal investments.

1) Belief in the Mission

You have read about how different programmers and developers disagree about certain technical and/or philosophical aspects of cryptocurrencies. Perhaps you come down on a particular side in these arguments. You may want to put your money where you mouth is and back a crypto fork that you truly believe in.

2) A Brighter Future

A review of different cryptocurrencies may reveal that some of the forks may have a brighter future as far as investors are concerned. They may have more room to run higher. The original cryptocurrencies have often experienced huge moves upward from when they were first created, but the forks haven’t necessarily had the same run-up. There may be a great chance at a home run investment with some of the forks.

3) Competitive Pricing

At the time of this writing, it costs nearly $19,000 just to own a single Bitcoin. You can certainly buy partial Bitcoins if you wish to do so, but many people prefer it when they own something completely. It is easier to get in on the ground floor with some of the crypto forks. For example, at the time of this writing it costs just over $15 to own a Bitcoin gold coin. That is much more affordable and reasonable for many investors.

Key Takeaways

At the end of the day, crypto forks serve the important role of developing new cryptocurrencies with new sets of rules. They also open up a whole new realm of investment possibilities. Both of these truths are very exciting. A soft fork involves small changes in the original cryptocurrency, whereas a hard fork comes forward after a dramatic change that creates a new separate branch. Bitcoin Cash and Bitcoin Gold are the most famous hard forks of Bitcoin.

Despite the lucrative opportunities given by forks, one must always remember the volatility of cryptocurrencies. Please invest only after taking risks and unregulated aspects of cryptocurrencies into account. Blockbank values the investments of its users and wants them to practice safe investing.