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Forking 101

06 January 2021 | ZebPay Trade Desk

Contrary to popular belief, forking isn’t just blockchain terminology. Its principles are embedded in the origins of software engineering. In software engineering, a fork takes place when developers take a copy of source code from one software package and start independent development on it, creating a distinct and separate piece of software.

In rather basic terms, a fork is what happens when a blockchain diverges into two potential paths — either with regard to a network’s transaction history or a new rule in deciding what makes a transaction valid. Sometimes forks are also willingly introduced to the network. This occurs when developers want to amend the rules of the software, and use it to decide whether a transaction is valid or not. Forking in each and every Blockchain is different, based on the design architecture and characteristics of a particular blockchain. 

Generally speaking, a fork can happen in either of the two following situations:

  • Anytime two miners find a block at nearly the same time.
  • Developers seek to change the rules the software uses to decide whether a transaction is valid or not.

Hence, one can say that forking happens because a set of miners, who create bitcoin, believe that there are more efficient options to optimise the exchange of an existing bitcoin.  Bitcoin forks are splits that happen in the transaction chain based on different user opinions about transaction history. These splits create new versions of Bitcoin currency, and they are a natural result of the structure of the blockchain system, which operates without a central authority. 

In essence, it’s actually quite simple: you get two chains with a shared genesis that are identical up until the forking point, after which they exist exclusively in parallel, creating two separate networks, both inherently serving a different purpose. Forks allow for a different development structure and experimentation within the Bitcoin platform, without compromising the original product. 

Since inception, the BitCoin blockchain itself has seen upward of 44 forks, which include some of the well known forks like Bitcoin Cash, Bitcoin Diamond, Bitcoin Gold, and Bitcoin Private, which see trading volumes of more than $100,000 per 24 hours. The two biggest and most popular Bitcoin hard forks, till date, are Bitcoin Cash and Bitcoin Gold.

Types of Forks:

There are two types of Forks, a Hard Fork and a Soft Fork. Let’s have a look at both of them in a little more detail.

Hard Fork:

A hard fork on a blockchain is a radical change to a network’s protocol. Processing a hard fork for all its users to upgrade to the latest version of the protocol software. Think of it like updating an app on your phone to use all its features. A hard fork entails a software upgrade that introduces a new rule to the network that isn’t compatible with the older software. It is a radical change to the protocol of a blockchain network that makes previously invalid blocks/transactions valid (or vice-versa). A fork in a blockchain can occur in any crypto-technology platform, not only Bitcoin.

The nodes of the newest version of a blockchain no longer accept the older versions of the blockchain; which creates a conflict with the older nodes of the blockchain. Adding a new rule to the code creates a fork in the blockchain: one path follows the new, upgraded blockchain, and the other path continues along the old path. Generally, after a short time, those on the old chain will realize that their version of the blockchain is outdated or irrelevant and quickly upgrade to the latest version. It is through this forking process that various digital currencies with names similar to bitcoin have come about: bitcoin cash, bitcoin gold, and others. 

There are a number of reasons why developers may implement a hard fork, such as correcting important security risks found in older versions of the software, to add new functionality, or to reverse transactions. An example is the Ethereum blockchain created a hard fork to reverse the hack on the Decentralized Autonomous Organization (DAO). 

Soft Fork:

In terms of blockchain technology, a soft fork is a change to the software protocol where only previously valid blocks/transactions are made invalid. Since old nodes will recognize the new blocks as valid, a soft fork ensures backward compatibility. A soft fork requires only a majority of the miners upgrading to enforce the new rules, as opposed to a hard fork that requires all nodes to upgrade and agree on the new version.

New transaction types can often be added as soft forks, requiring only that the participants and miners understand the new transaction type. A soft fork can also occur at times due to a temporary divergence in the blockchain when miners using non-upgraded nodes violate a new consensus rule their nodes don’t know about. Soft forks don’t require any nodes to upgrade to maintain consensus since new and old rules co-exist, and users can hence easily adopt them. Soft forks cannot be reversed without a hard fork since a soft fork by definition only allows the set of valid blocks to be a proper subset of what was valid pre-fork.  In order for a soft fork to work, a majority of the mining power needs to be running a client recognizing the fork. The more miners that accept the new rules, the more secure the network is post-fork.

Soft forks have been used on the Bitcoin and Ethereum blockchains, among others, to implement new and upgraded functionalities that are backward compatible. This means that the new protocol will be recognized by old nodes within the system. It also means that there is not a new product being launched, but just a modification of the old product itself. 

Conclusion:

Many miners and cryptocurrency service providers are divided on their views on forking. Majority of bitcoin miners do not believe in increasing the block size and the idea of new cryptocurrencies branching out through a well defined existing protocol. And for a fork to be successful, the majority of the miners in the network have to come to a consensus. Moreover, hard forks often create price volatility. It’s important to know the context and details around each fork in order to take advantage of these sometimes drastic and sudden changes. 

In ZebPay’s weekly reports and insights compiled by the Trade team, we aim to provide market updates, technical analysis, breakdowns of new coin launches, and more. All to help you unlock the full potential of trading and investing on ZebPay. Happy Trading!

References:

https://www.investopedia.com/
https://thenextweb.com/
https://lightrains.com/
https://www.livemint.com/
https://www.thebalance.com/

Disclaimer :

This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.

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