Blockchains and their cryptocurrencies are decentralized networks where no one entity has total oversight or control. This can be good, but what happens when not everyone agrees on a new development? The answer can come in the form of a resulting “fork,” such as a “Bitcoin fork.”
What exactly is a Bitcoin fork? Why does it happen? And what are the results? This article will answer these questions and provide historical examples of previous Bitcoin forks. It will also outline the implications of a fork and what you need to do when the next one occurs.
Table of Contents
What’s a Bitcoin Fork?Important Bitcoin ForksPros and Cons of Bitcoin ForksHow Do Bitcoin Forks Affect You?
What’s a Bitcoin Fork?
A Bitcoin fork is an example of a broader phenomenon common to blockchains and open source software. Such collaborative projects are meant to be constantly improved, much like the way your apps are updated regularly on your phone.
But unlike a piece of software controlled by a company that makes decisions on what enhancements it will release and when, collaborative software products depend on consensus: general agreement by developers and users of the software or network.
So what happens when not everyone agrees? It may not be a matter of right and wrong. At times, it could just be varying support for new features or changes to protocol. Other times, it might be a difference in what developers want versus what miners or other network participants are looking for.
In such cases, two versions of the software or platform may develop. The “fork” is the departure of one version from the other. Sometimes with different enhancements; sometimes with one remaining “original” and the fork developing new characteristics.
Not all forks are the same. “Soft forks” are more minor modifications that leave the new approach backward compatible with the older, established code. “Hard forks” tend to reflect radically different approaches and a lack of agreement on how to proceed.
Hard forks, therefore, are more significant and may carry more risk. In some ways, they represent predictions by developers as to which features and network improvements will have the most success. In such instances, there are a few possible outcomes.
The new fork may succeed so well that it eclipses the original, which then fades into oblivion. Or the new fork may prove to be unpopular and suffers that fate, while the original maintains its reputation and use.
Finally, there is a risk that both approaches after the fork could fall out of favor and both resulting blockchains lose value and eventually disappear.
Most of the well-known Bitcoin forks have been of the hard variety. In fact, many are such a departure that they’ve given birth to new types of cryptocurrencies.
Important Bitcoin Forks
Bitcoin XT
In 2014, one of Bitcoin’s early developers wanted to increase the speed at which Bitcoin transactions were processed.
Bitcoin XT was launched to target improving transaction speed from seven to 24 transactions per second. How? By increasing the block size — the amount of data that could be recorded in each block added to the blockchain — from one to eight megabytes.
After initially increasing in popularity, it faded to the point that it is no longer available.
Bitcoin Classic
This Bitcoin fork targeted the same issue as the Bitcoin XT fork: transaction processing speed. Its solution: increase the block size to two megabytes from one. Like Bitcoin XT, it never really took off and is now kept alive by a few enthusiastic supporters.
Bitcoin Unlimited
It’s all there in the name: Block size can be determined by miners (participants who validate transactions and vie for the right to add validated blocks to the blockchain) up to 16 megabytes. It has not become widely accepted.
Bitcoin Cash
In 2017, a Bitcoin hard fork gave rise to Bitcoin Cash (BCH). It also sought to increase the block size so that each block could hold more transactions for greater speed.
The Bitcoin Cash fork has proved successful so far, with BCH ranking in the top 25 for cryptocurrencies by market capitalization.
Bitcoin Gold
The October 2017, Bitcoin Gold (BTG) fork represented an attempt to make mining once again possible for any participant in the blockchain — not just those with super-specialized powerful computers.
This fork made use of an algorithm that wasn’t conducive to specialized ASIC (application-specific integrated circuit) processors. Instead, anyone with a regular computer could participate as a miner and receive coins as a reward.
Segregated Witness (SegWit)
2017 was a very busy year for Bitcoin forks. In August, one fork sought to speed things up — a recurring theme — by simplifying the data stored in each block. Specifically, the new approach removed signature data, freeing up more space for actual transaction information.
SegWit did, in fact, improve the Bitcoin blockchain’s performance. It has since been improved upon to further speed things up. It’s a good example of a soft fork, as it did not result in the start of a new blockchain but instead made the existing one better.
Litecoin
Litecoin (LTC) hails from a 2011 fork and, as with other forks, attempts to improve Bitcoin’s transaction speed. But it didn’t attempt to enlarge transaction blocks.
Instead, Litecoin employed a different proof-of-work mining algorithm, “scrypt,” which speeds things up, giving rise to the “lite” moniker — a Bitcoin that is “lighter and faster.” Litecoin is still in use and ranks just outside the top 20 cryptocurrencies by market cap.
Pros and Cons of Bitcoin Forks
Bitcoin forks can sound like a “point of no return” development full of risk. As we’ve seen, though, they are really a normal part of collaborative network development. That said, as with many things, they carry advantages and disadvantages.
Pros
Our brief review of notable Bitcoin forks has shown they often attempt to solve known issues. Network efficiency, for instance. And sometimes the fork really does do as intended — SegWit increasing transaction speed and efficiency, for example.
Forks can also introduce approaches that can make for better security. And can serve as a refinement of a network’s original goals and beliefs, as in Bitcoin Gold’s attempt to make mining accessible to all as it had originally been on the Bitcoin blockchain.
Cons
New versions of software inherently carry risk. Think of all the fixes and patches that often follow a major software operating system upgrade, for example. The same is true for major changes to a blockchain.
Unforeseen bugs and glitches may introduce network instability for a time. The network may, in fact, temporarily become more vulnerable to attacks.
There are also effects on the price of the crypto itself. Sometimes, forks can bolster the price. But then again, as we’ve seen with previous forks, this increase may be temporary, and the new crypto formed by the fork may, in fact, lose much of its value and even fade away entirely.
How Do Bitcoin Forks Affect You?
If you are holding Bitcoin and a major hard fork occurs, what happens to your holdings? Things can potentially get interesting because of the nature of a fork: where there was once a single path, now there are two. Does this mean you will now be holding two cryptocurrencies?
Well, maybe. Practically speaking, if a fork results in a new cryptocurrency being formed, you will technically hold equal amounts of each. But this is not the same as saying your holding has magically doubled. Why?
There is no way to predict the value of each cryptocurrency post-fork. Both could remain as before, both could increase, one could remain stable and the other plummet, both could plummet — there are many possibilities. But this does raise an interesting issue: claiming your coins.
Why would you need to claim coins that are already yours? You don’t. What was yours is still yours. What you will need to claim are the new forked coins that result from the new blockchain. And you will want to take some time to consider before doing so.
The new fork and its coins are, technically, an unknown. Will it be worth the effort and any possible risk to claim them? Forking events are known to attract fraudsters seeking to take advantage of confused users. So proceed carefully before trying to claim any forked coin.
Many reputable exchanges and hardware wallets will, in fact, make it straightforward for crypto holders to obtain the new forked coin. After the new fork gets up and running, they’ll make the new coins available, often in the form of a new wallet or entry to your exchange account.
In these cases, the best thing to do is to wait patiently for the forked coin. Another reason to make sure your crypto partner is a trusted one, like Binance.US.
Download the Binance.US app to trade on the go: iOS | Android
Legal disclaimer: This material has been prepared for general informational purposes only and should NOT be: (1) considered an individualized recommendation or advice; and (2) relied upon for any investment activities. All information is provided on an as-is basis and is subject to change without notice, we make no representation or warranty of any kind, express or implied, regarding the accuracy, validity, reliability, availability or completeness of any such information. Binance.US does NOT provide investment, legal, or tax advice in any manner or form. The ownership of any investment decision(s) exclusively vests with you after analyzing all possible risk factors and by exercising your own independent discretion. Binance.US shall not be liable for any consequences thereof.
Risk warning: Buying, selling, and holding cryptocurrencies are activities that are subject to high market risk. The volatile and unpredictable nature of the price of cryptocurrencies may result in a significant loss. Binance.US is not responsible for any loss that you may incur from price fluctuations when you buy, sell, or hold cryptocurrencies. Please refer to our Terms of Use for more information.