Fork

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A fork is the branching off of a cryptocurrency's blockchain network into two distinct paths.[1] This often happens when two people mining the cryptocurrency find a block at almost exactly the same time, creating two identical blocks. This is usually resolved when subsequent blocks are added to only one of the blocks, leaving the other behind as an "orphan block." Forks can also be the result of the community surrounding a cryptocurrency splitting due to ideological, technical, or political disagreements about how to guide the future of the network, sometimes resulting in the creation of an entirely new cryptocurrency based on a pre-existing one.[2]

Overview

Unlike a stock split, a fork is not necessarily made with the intention of improving ease-of-access for retail investors.[3]

A fork can occur for a complex range of reasons; often it is an attempt by splinter groups within a blockchain community to make short-term gains by capitalizing on the name of an existing cryptocurrency, such as bitcoin.[4] Other times, a software update that can lead to a fork can be implemented for less mercenary reasons, such as a communal desire to improve the cryptocurrency's viability for users in everyday situations, such as making smaller transactions faster and cheaper.[5] This is usually executed by implementing software updates that are incompatible with the cryptocurrency's older software. In other words, nodes that have installed the new software to view transactions verified by nodes running the older software may classify these transactions as invalid.[6]

There are two basic types of forks: Soft Forks and Hard Forks.

Hard Forks

A hard fork is a significant change in the structure of a blockchain that allows a new branch of a blockchain to be constructed from the original. Typically, a hard fork is a change in a blockchain's software protocol that results in some blocks that were considered invalid before the protocol change to be recognized as valid by nodes that adopt the new protocol, if those blocks follow the new protocol's rules.[7] Nodes that do not adopt the new software and instead continue running the old version will still see the transactions that follow the new protocol as invalid. This creates an irreconcilable schism in the network that leads to a new branch of the blockchain forming separate to the old, "Legacy" chain. Both chains may remain in operation so long as both branches have a more or less equal number of nodes supporting them. This sometimes leads to the creation of a totally new cryptocurrency whose blockchain is actually a forked branch of an older one.[8] One example of this is Bitcoin Cash, which was created as the result of a hard fork on the bitcoin blockchain in 2017.[9][10]

Research findings on hard forks

A study published in September 2018 by the Oak Ridge Institute for Science and Education found evidence suggesting that hard forks on a cryptocurrency's blockchain tend to have a negative effect on the overall stability of that blockchain. One of the authors of the study, research fellow Benjamin Trump, said that hard forks tend to undermine trust in a particular cryptocurrency. The study also found that a large number of cryptocurrencies that resulted from forks on bitcoin's blockchain as well as other altcoins did not survive more than a few months following the fork. Despite this, the study predicted that hard forks would become more common, despite representing an existential threat to the concept of cryptocurrencies as viable means for monetary transactions.[11] Some examples of altcoins that managed to thrive that were mentioned in the study are Litecoin, Dogecoin, and Vertcoin.[12]

Soft Forks

A soft fork occurs when an optional software protocol is introduced that changes the way a cryptocurrency's software works but doesn't result in a completely new branch of the blockchain or a new cryptocurrency. Typically, a soft fork happens when this new software protocol causes certain blocks that were considered valid before the protocol change to be recognized as invalid by nodes that adopt the new protocol, if these blocks violate the new protocol's rules.[13]

An example of a soft fork is the introduction of SegWit, a software update to bitcoin's blockchain designed to make transactions cheaper and faster for users without increasing the capacity of each block.[14]

References