What Are Crypto Forks and How They Affect Crypto Market
A crypto fork is something that you do not hear when you just got into cryptocurrencies. Bitcoin, a decentralized form of cash created back in 2009, is a pathfinder in the cryptocurrency world that every investor is aware of, but the market is not limited to just Bitcoin or Ethereum. There are actually various ways in which cryptocurrencies are created.
One of such ways is called “forking”. As Bitcoin Cash (BCH) is a result of Bitcoin (BTH) forking, cryptocurrency forks are not created by a mere accident. There is a complicated process involved.
To help you get a better understanding of the crypto world and change your perspective a little bit, we will discuss what crypto forks are and what impact they have on the market and how valuable they can be for crypto investors in general.
What is a crypto fork?
If we want to describe “forking” in simpler words, the overall process can be summarized as a deviation in the blockchain protocol responsible for the transaction processing. When the blockchain code is altered, a fork appears. This is how Bitcoin Cash, Bitcoin SV, and Bitcoin Gold appeared, being simple diversions in the blockchain network.
How do forks work?
To get a more precise idea of a crypto fork, we must understand why they occur in the first place. It is no random action – forks take place when there are certain cryptocurrency improvements expected to be made. For example, it can be the dissatisfied user base demanding to change the existing cryptocurrency outdated features, or cryptocurrency developers who disagree on some operating principles of the cryptocurrency they created. Sometimes it can take a hack attempt or a security breach that needs to be patched up immediately.
However, it is not necessarily some bad event prompting a crypto fork. A fork can occur as a convenient way to crowdsource funding to support various projects or cryptocurrency offerings.
What happens to the blockchain when such changes are applied? The participants’ consensus is getting split within the network, resulting in the blockchain splitting in two parts.
When a fork finally takes place, the blockchain network members have to choose the network version to operate on. For that reason, forks are divided into types, soft forks and hard forks.
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What is a soft fork
A soft work is an alteration to the software protocol where these are only old transactions that are considered valid. In other words, this software change is only backward compatible. It doesn’t mean that previous nodes won’t recognize the new transactions, it only means that the new “altered” nodes will not recognize the new blocks created on the network. Soft forks are quite demanding in maintenance – they require a lot of hash power and most of the miners to upgrade and enforce the new blockchain regulations.
What is a hard fork
A hard fork takes place when there is a drastic change in the blockchain protocol, usually resulting in invalid blocks getting validated again, or vice versa. For a hard fork to happen, all the network members must agree to upgrade to the new “altered” software version. In time, even soft forks can become hard forks.
A hard fork fixes the backward compatibility, preventing the main blocks from being invalidated. If the blockchain members wish to continue mining new chains, they have to upgrade to the new version. In other cases, those who decide to run on the older software version will cause the blockchain to split, which means there will be two separate currencies.
Forks impact on the crypto market
As for the cryptocurrency prices, forks can affect them in both positive and negative ways.
Let’s take Litecoin, for instance. It is an example of a positive fork impact on a cryptocurrency. Litecoin hard fork eventually ended up as a new coin. Its price rose significantly, thus granting investors the opportunity to make some money.
Unfortunately, forks can be troublemaking for the crypto community. People happen to have a different vision and expectations for a separate cryptocurrency, and therefore it can be tough to reach a mutual understanding within the community.
Bitcoin Cash is an example of a negative impact on the crypto community. Even though it was intended to become a True Vision of Bitcoin, Bitcoin Cash resulted in disruptive debates within the community dividing into fractures.
Crypto forks can be powerful in the market whales’ hands – with investing in a new fork, they can tremendously change the market trajectory, in both negative and positive ways.
Bitcoin’s happened to have plenty of forks in the past years. However, no one agreed on one fork as the most canon or finite, as the community keeps challenging the Bitcoin capacities.
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