What Does Forking Cryptocurrency Mean?
Forking cryptocurrency could make two versions of a digital currency. But why it was needed to be done in the first place? Learn more.
Sometimes cryptocurrency could be divided into two types, and that process is called forking. This happens usually when the code in the cryptocurrency is changed and can be considered difficult (the two new software that underlies each cryptocurrency are not compatible).
The results of the forking cryptocurrency are two different versions of it. A common example of forking cryptocurrency is Bitcoin Cash, which separates from Bitcoin into a new cryptocurrency with a completely new value — if you have Bitcoin Cash, you cannot send it to the normal Bitcoin blockchain during a transaction.
Now if you still find much confusion with the concept, it’s fine. We have every answer to your questions about forking cryptocurrency. Here’s everything you need to know about it.
What is forking cryptocurrency?
Forking cryptocurrency simply means splitting the blockchain technology or system within a cryptocurrency network, and causing a divergence in the pathway of how that particular cryptocurrency runs in the blockchain. This splitting could either be temporary (soft fork) or permanent (hard fork).
For example, Bitcoin was split into Bitcoin Cash (BCH) the first hard fork which happened on 1st August 2017. Since then there have been a lot of Bitcoin forks such as Bitcoin SV, Bitcoin ABC, etc.
So why does a cryptocurrency got forked?
There are a couple of reasons why this happened. First, if developers cannot come into some sort of mutual agreement regarding an upgrade.
Second, miners believe there are more efficient ways to run the blockchain to prevent backlogging compared to the existing means.
And the third, if the block size is not enough to add more transactions or the transaction can get slower leading to a reduction in miner’s income. For example, Bitcoin Cash has a block size of 8MB compared to Bitcoin with a block size of 1MB.
How does forking impact the holders and investors?
Well the good news is that when a crypto is experiencing a fork the users, holders, and investors all get an equivalent amount of the original coin and the new coin in your crypto wallet.
Let’s say you got 10 BTC in your wallet and when Bitcoin was forked to BCH, everyone who had BTC got 10 BCH in their wallet. BCH is among the top 10 cryptocurrencies in the market (sitting at No 5 spot at the time of writing), so you got a pretty sweet deal of free money!
But remember every hard fork doesn’t do well in the market as expected so it entirely depends on the coin which forked and how the new coin is being traded in the market compared to the original one.
What is the difference between soft fork and hard fork?
A soft fork results in an upgrade of the previous version of blockchain which follows the same rules as its predecessor, in other words the coin doesn’t split into two and is compatible with the earlier versions of the blockchain protocol.
Example: Cardano (ADA) forking into Shelly with a new version and mainnet upgrade for better scalability of transactions. But Shelly is not a new coin and it will still follow the rules of Cardano blockchain with its new upgrade.
On the other hand, a hard fork results in splitting of a coin into two with the new coin having a different pathway and following a completely different set of rules in contrast to its predecessor.
An recent example of a hard fork would be Steem (STEEM) cryptocurrency resulting in Hive (HIVE) due to argument among community members over TRON’s acquisition of Steemit Dapp. Now the users who had STEEM tokens before the split happened in March 2020, got an equal number of HIVE tokens.
Will be there another fork in the future?
As cryptocurrencies become more and more popular and the community keeps growing, there is a greater potential for forking cryptocurrency to happen due to disagreement among community members and the need for bigger size blocks for transactions to process through.
So watch out forks!
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated August 8, 2022