Cryptocurrencies evolve over time. New features are created, bugs are fixed, and improvements are made to the software . However, when an update makes the new version incompatible with the previous ones, we have a hard fork , a division . If part of the community chooses to stay with the old version, this fork becomes a new cryptocurrency, regardless of the old one.
The criptomoedas are software open source and, in general, its development is done collaboratively. Any developer can suggest modifications and write new lines of code, although they need to be accepted by the community. Only then will this new version of that cryptocurrency's software be implemented.
What are Cryptocurrency forks?
Cryptocurrencies are processed through a computer network where users themselves maintain a copy of the database with all transaction history. Thus, each computer connected to the network is called a node ( node ), which verifies that the blocks containing transactions follow the rules, called "consensus rule" .
If any changes are made to these standards, all nodes need to be updated. Otherwise, a part of the network will consider certain transactions invalid. It is this “deviation of route” that we call fork .
The forks, therefore, generate a fork in the blockchain, which can generate an independent cryptocurrency . Therefore, heated debates take place until everyone accepts, or not, to update the source code.
The Bitcoin was the first cryptocurrency , launched in 2009, but there are numerous forks , which gained life.
The types of forks: Hard Fork and Soft Fork
A fork will always introduce some rule or functionality that the previous version of the software did not have or did not allow.
Soft Fork
If the change does not cause an incompatibility with the old consensus rules, then it is considered a soft fork .
An example of a soft fork is to add an information field in transactions with the currency quote. Users running old software on their nodes will accept transactions as normal, although without “seeing” this additional field.
In this way, nodes running the previous version will accept both transactions, in the new and old model, without difference.
Hard Fork
When there is a change in the software that makes the blocks invalid for old nodes, a hard fork is characterized. In hard forks, functions or types of transactions that were previously prohibited are allowed.
In this way, the new blocks will be rejected by all nodes that do not update. A simple example is the increase in the capacity of transactions in the blocks.
Therefore, it is imperative that in hard forks everyone updates the software so that the fork does not end up generating two distinct cryptocurrencies.
What happens when there is no agreement?
In the soft fork, a minority can update first and gain the support of the rest of the network over time.
However, in the hard fork everyone needs to update their software ( nodes ) at the same time. When this does not happen, the blocks are rejected by those who have not updated their system.
In some cases, part of the community gives up on seeking consensus. When that happens, a new cryptocurrency “is born”. The two cryptocurrencies share the same history up to the time of the fork, but now have separate stories after that .
However, it is necessary to remember that this new cryptocurrency must seek its own network of miners, listing in exchanges (brokers), and team of developers.
Hard Forks Examples
Bitcoin Cash (BCH)
The hard fork that gave rise to Bitcoin Cash is the most famous example. In this case, the Bitcoin (BTC) user community was unable to reach an agreement. The reason was the discussion to solve the scalability problem.
In fact, there was a group that wanted to increase the limit of transactions per block, regardless of the consequences. However, the will of most users prevailed, to keep the limit at 1 megabyte. In view of this, they sought to scale through second-tier applications, “on top” of Bitcoin. In this respect, the Lighting Network is an example of an alternative.
Proponents of the larger blocks were in the minority, but decided to make the change anyway. The cryptocurrency that formed from this fork in 2017 came to be called Bitcoin Cash (BCH).
This new cryptocurrency took a few months to be listed on most exchanges . It is worth remembering that despite taking advantage of Bitcoin addresses and balances at the time of its fork , its quote is completely different and independent of Bitcoin (BTC).
Ethereum Classic (ETC)
In 2016, Ethereum also went through a hard fork. One of the network's smart contracts was called “The DAO”, or Autonomous Decentralized Organization. However, shortly after its launch, a vulnerability was discovered, causing a loss of $ 4 million.
Ethereum's creator Vitalik Buterin proposed a hard fork to return the values to the injured people. Despite this effort, the proposal was opposed by a portion of the community.
In this case, despite Ethereum (ETH) being the cryptocurrency originating from the fork, it was able to keep its name because the majority of the community was in favor of the change . The “original” network continued to exist, and became known as Ethereum Classic (ETC), an independent cryptocurrency.
Litecoin and Monero are forks?
Despite having their code based on other cryptocurrencies , Litecoin and Monero are not considered forks . In this sense, cryptocurrencies originating from a fork share their history of mined blocks, and balances in portfolios until the moment of the fork.
In this way, Litecoin and Monero are cryptocurrencies that started from scratch and conquered their own user base , regardless of whether they based their source code on Bitcoin.
What is the importance of forks?
The forks are important for the criptomoedas follow its evolution . Even when hard forks generate a new cryptocurrency, investors end up benefiting, and the community wins with freedom of choice.
Disagreeing or not with a proposed update, each side can follow its own path. This is an important quality of cryptocurrencies.
What is the advantage of forks?
One of the great advantages of forks for investors is that they now have the same amount of cryptocurrencies in both networks. That is why some people call forks "free money", although the price of both will vary freely.
If both currencies have a market value it is good for everyone, but there is no guarantee that the forks will survive. This will depend on the support of miners, exchanges, developers, in addition to the user base itself.
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Nice one! I like the way you gave examples of popular forks.