Fork Explained: What Is Fork in Crypto and How Does It Work?

When it comes to cryptocurrencies, blockchain is the backbone of the entire decentralized system. Think of it as a chain made of blocks of data, tracing back to the very first transaction. A blockchain operates on open-source software, meaning it’s open to anyone to contribute and improve.

When a community decides to tweak the basic rules of this blockchain, because of decentralization it sparks something called a fork. Essentially, a fork is like a split in the blockchain’s path that sends it in two different directions. This change creates a new path, a second blockchain, while still retaining all the history of the original. But what exactly does this mean? In this article, we’ll dive deeper into what a fork is and how it works. Let’s have a look:

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What Is a Fork?

A fork is a split in the road of the software protocol. It happens when the existing rules of the blockchain system divide into two versions, co-existing side by side. Sometimes, this split occurs accidentally, like when two miners find a block simultaneously, causing different nodes to record different information and resulting in two separate chains. However, these accidental forks are quickly identified and resolved because they stem from a disagreement in the consensus of the network.

Most cryptocurrency forks, though, are intentional. Developers purposely tweak the source code to introduce new features or change how the network operates at its core. This intentional fork results in a new software version, similar to the original but with substantial changes. These changes are permanent, requiring users of the network to update their software to the latest version. Sometimes, intentional forks lead to the creation of a new protocol, a new digital asset, and even a new community.

Regardless of their type, all cryptocurrency forks share a common starting point: the parent protocol. They also retain the transaction history before the split to protect continuity despite the divergence in rules.

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Why Do Crypto Forks Occur?

Crypto forks occur for multiple reasons. In open-source blockchain networks, developers have the freedom to suggest and implement changes deemed necessary. These changes could involve improving the current chain, introducing new features, or strengthening security measures. Additionally, forks may arise to settle disputes within the community, especially when developers, miners, or users disagree on the blockchain’s trajectory. In simple words, forks happen to add new functionalities, tackle security concerns, or resolve community disagreements about the cryptocurrency’s direction.

How Does Forks Work?

There are two different kinds of forks, and both work differently.

• Hard Forks
• Soft Forks

What Is a Hard Fork?

A hard fork is a major change in a cryptocurrency’s protocol that renders it incompatible with previous versions. This means nodes using the older protocol can’t process transactions or create new blocks on the updated blockchain. Similarly, transactions on the updated chain aren’t recognized on the older chain. To participate in the updated chain, all nodes and miners will need to upgrade to the latest protocol version. An example is Ethereum Shapella, which underwent a hard fork during the Shanghai Upgrade in April 2023. One of its key features is enabling validators to unstake ETH from the Beacon Chain. Bitcoin Cash is another example that evolved out of Bitcoin.

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What Is a Soft Fork?

A soft fork is a change in a cryptocurrency protocol that maintains backward compatibility. This means that nodes using older versions can still process transactions and add new blocks to the blockchain as long as they adhere to the updated rules. Unlike a hard fork, which requires all nodes to upgrade, a soft fork only needs a majority of miners to adjust to the new rules.

For instance, in 2017, Bitcoin underwent a soft fork to introduce the SegWit (Segregated Witness) upgrade. SegWit brought several improvements to the Bitcoin network. It fixed a protocol bug, reducing vulnerability to malicious attacks. It also increased block capacity, leading to faster and cheaper transactions. Additionally, SegWit laid the groundwork for potential future scalability enhancements.

Benefits of Forks

Encourages Innovation and Exploration

Forks provide an opportunity for development teams to explore new ideas and solutions when disagreements arise about the direction of a blockchain. This exploration can lead to innovations that benefit the entire crypto community. It also makes sure that the blockchain improves with time and does not stay in the same place, falling behind in technology.

Increases Competition and Investment

The creation of a new blockchain and coin through a fork introduces competition in the cryptocurrency market. This competition can attract new investment and, over time, increase liquidity in the crypto market. For allows existing blockchains to get better which means that there will always be a race and new advancements will keep coming.

Facilitates Technical Improvements and Upgrades

Successful technical improvements and upgrades, such as soft forks, improve the functionality of a blockchain. This evolution can lead to increased adoption of the technology and the appreciation of the coin’s value. As mentioned before forks are a way for blockchain to stay up to date with technology.

Drawbacks of Forks

Complicates the Blockchain and Causes Confusion

Not every crypto investor may comprehend or even be aware of a fork when it occurs. Given that crypto is an emerging and intricate industry, this lack of understanding can lead to confusion and uncertainty among participants. Not everyone is fully involved in the cryptocurrency market, and most investors are not even aware when a fork happens.

Strain on Network Resources

Forks (especially hard forks) can strain a network by dividing its resources. This division can increase operational complexity for miners and nodes, require greater storage and bandwidth, and pose challenges for crypto exchanges in deciding which coin version to support.

Check out: How to choose the right cryptocurrency exchange?

Weakened Network Security

A strained network resulting from a fork can weaken security due to diluted hash power. Moreover, if miners (who secure the network) and nodes (that validate transactions) are divided and in disagreement, the network’s security diminishes. This increases the risks of attacks dramatically and makes the blockchain vulnerable.

Conclusion:

To sum up, cryptocurrency forks show the evolution of blockchain networks, ranging from minor adjustments to major transformations. While they can bring innovation and attract new investors, forks also present notable challenges and risks. Some may succeed in enhancing the technology and market, while others may face obstacles. It is one of the marvels of the blockchain technology and investors should always tread carefully while dealing with a cryptocurrency that is going through a fork.

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