Understanding Forks And Their Implications


written by @emylacapra


Forks are a rather common occurrence in cryptocurrency ecosystems. However, depending on the type of fork, they may turn out to be an upsetting and disruptive event for investors, users, developers and miners alike, when the change is radical and controversial across the whole community.


Besides explaining what forks are, this article will elaborate on the implications that emerge from such events, and why in the past they have marked dramatic episodes in the history of cryptocurrencies.


Just like a junction where one road becomes two diverging roads, a fork in software development - therefore Bitcoin or any cryptocurrency - occurs when there is a split with the existing set of rules or protocol.


The change can be anything from correcting important security risks found in older versions of the software to adding new functionality, reversing transactions or increasing block sizes.


While Satoshi Nakamoto never explicitly referred to forks in the Bitcoin whitepaper, at the end of the document he affirmed that:

“Nodes can leave and rejoin the network at will, accepting the proof-of-work chain as proof of what happened while they were gone. They vote with their CPU power, expressing their acceptance of valid blocks by working on extending them and rejecting invalid blocks by refusing to work on them. Any needed rules and incentives can be enforced with this consensus mechanism”.

Consensus rules are the basis for collaboration between all bitcoin nodes and are responsible for the convergence of all perspectives into a single consistent chain of blocks across the entire network. The consensus mechanism built in Bitcoin and other distributed ledger technologies requires that full nodes enforce a specific set of rules with regards to validity of blocks and transactions. When the consensus is broken, a fork occurs:Any needed rules and incentives can be enforced with this consensus mechanism.” Everything else develops into a fork.


Three Main Types Of Forks


Temporary Forks occur quite regularly when two miners mine a new block within a short period of time from each other and compete to form the longest chain. One will have more confirmations than the other, the so-called orphan block, and both will be creating two different chains.

Technically they are forks but only temporary because they will be eventually resolved by reconvergence as more blocks are added to the network. Consensus will form around the longest valid chain.

Soft Forks are simple upgrades to the software in an optional and backwards-compatible way, so that the old software will still recognise blocks created by nodes that have chosen to update theirs, and vice versa. An analogy for a soft fork might be upgrading a computer’s operating system.

As both old and new groups of users remain part of the same network, a soft fork will never result in the creation of a new cryptocurrency.


A typical example of Bitcoin’s soft fork is SegWit.

Hard Forks are updates to a protocol in a non backwards-compatible way so that users running the old software will not recognise blocks created by those running the new software. For this reason, hard forks usually lead to a split in the chain, with a group of users effectively leaving the old network to create their own cryptocurrency.

For a hard fork to occur, the implementation of new consensus rules must be adopted and the new rules must be activated by miners, wallets, and intermediary nodes.

In essence, with a soft fork, only one blockchain will remain valid as users adopt the update while with a hard fork, both the old and newly created blockchains exist on divergent paths.

The best example of Bitcoin hard fork is what happened on 1st August 2017 when the strong disagreement over the blocksize led to a major split with the creation of a new chain of blocks and a consequent new cryptocurrency, Bitcoin Cash. This new currency effectively copied Bitcoin's UTXO set (user balances) onto a new ledger, so any Bitcoin owner would now simultaneously own and control the keys to the same number of Bitcoin Cash.

In the case of Ethereum, for instance, due to the infamous DAO hack which led to the theft of $50million in cryptocurrency, the Ethereum Foundation created a new version of the Ethereum mainnet on 20 July 2016 in order to remove traces of the theft from the original Ethereum blockchain history.

Two cryptocurrencies were created, Ethereum with ETH as the ticker, and the older, unaltered version of Ethereum was renamed and continued on as Ethereum Classic with ETC as the ticker.

History Of Major Bitcoin Soft And Hard Forks


  1. October 2011: Litecoin is created by copying Bitcoin's codebase and making modifications. Important to note: the network was started fresh without copying the existing UTXO set (user balances).

  2. March 2013: An accidental hard fork occurred when a bitcoin miner running version 0.8.0 created a large block incompatible with earlier versions of Bitcoin. Anyone running this software quickly converted back to a previous version of the software to ensure consensus was maintained.

  3. August 1, 2017: Bitcoin forks to form Bitcoin Cash. UTXO set is carried over and the project attempts to obtain the title of Bitcoin. This does not come to fruition.

  4. August 23, 2017: SegWit soft fork gets activated.


A list of bitcoin past and future bitcoin forks can be viewed here.


The list is full of coins named after Bitcoin; Bitcoin Cash (BCH), Bitcoin Satoshi Version (BSV), Bitcoin Gold (BTG), Bitcoin Private (BTCP), Bitcoin Diamond (BCD) and many others. They are mostly hard forks imposed by Bitcoin Core critics who claim that their own versions of Bitcoin are better or true to its original purpose. Consensus of hashrate, transaction volume, price and many other metrics has proven otherwise.



Political, Monetary and Ethical Implications of Hard Forks


Political


Bitcoin and other cryptocurrencies governance relies on complicated relations and varied interests so it’s no surprise that maintaining standard regulations is no joke.


When Bitcoin hard forked into Bitcoin Cash, the repercussions were felt across the whole crypto community. In the weeks and months following the event, users were confused as to which cryptocurrency to adopt and which group to support.


The Bitcoin Cash increased block size was incompatible with Bitcoin, whose community prefers smaller blocks so that storage requirements to run a node remain limited, allowing for more people to run nodes and increase network decentralization.


The split eventually led to an irreversible fracture between the two communities, one side that wanted to remain faithful to the original Bitcoin proposals and the other that was favouring wild transaction throughput scalability at the expense of decentralisation.


Over time, the community behind Bitcoin Core resulted in the most supported chain, while Bitcoin Cash continues to exist as the fifth coin per market cap yet representing only a fraction of the overall BTC volume and capitalisation.


Monetary and Economical


For Bitcoin or any project, constant hard forks could represent a long-term threat in terms of capitalisation and circulation.


When hard forks create a new coin, generally the holder of the original currency receives the new coin in equal amounts. For example, when Bitcoin forked into Bitcoin Cash, holders of 1 Bitcoin at the time of the fork received 1 Bitcoin Cash after the fork. The same happened with other major bitcoin hard forks like Bitcoin Gold.


The consequence is that market capitalisation could feasibly begin to disperse over the other altcoins after forks. In the event that new assets garner interest and support, a consequence of this could be pulling market capitalization from the original asset itself.


In terms of circulation, Bitcoin has a hard cap of 21 million coins. However, hard forks that retain any value as altcoins can happen any time, and in aggregate have an uncapped supply.


For example, with Bitcoin Cash, Bitcoin’s original 21 million circulation cap remained, but a new 21 million cap of a new asset emerged. At the time of the fork Bitcoin's market cap was largely unaffected and Bitcoin Cash's market cap seemed to effectively be created out of thin air - but the complexities of claiming the forked coins, the number or lost coins, and general liquidity can be brought into question here.


Over time BCH established itself as a totally different asset to BTC, both from a protocol and a price perspective, becoming fully independent from Bitcoin. An argument has been made that altcoins resulting from hard forks dilute bitcoin and result in it no longer being finite in supply. When considering this argument - one must ask themselves: does the hyperinflation of the Venezuelan Bolivar or any other world currency have a direct impact on the relative desirability and issuance of the US dollar, or Gold?


Ethical


We’ve examined how forks are often disruptive experiences for the crypto community. Competing visions for the future of a cryptocurrency might not co-exist, and traders and miners might have no other choice but go separate ways.

Sometimes, this level of disruption can be enough to prevent a fork from taking place.The controversial Segwit 2X fork was abandoned in November 2017 due to the fact that its proponents had not built sufficient consensus for a clean block size upgrade. Fears that the upgrade could have led to another hard fork thus further destabilizing Bitcoin put the plans on hold.

When the Dao incident happened and a fork of Ethereum had to be enforced, the event met the opposition of many that considered it as unethical because it betrayed the main propositions of distributed ledger technologies; decentralisation and immutability. This event was seen by most as a turning point for Ethereum, when its reputation as a robust and trustworthy asset became largely endangered.


Something similar to the DAO incident happened last year, when top crypto exchange Binance was hacked and 40 million worth of BTC were stolen. Changpeng Zhao himself, founder and CEO of the exchange, proposed to reverse the Bitcoin chain in order to recuperate those funds and give them back to the users who had lost them.

While it could have been in the interest of the victims to recover the stolen coins, the community pretty much unanimously and strongly opposed the decision that would have led to a reorg of the chain and a nearly guaranteed hard fork. Taking such actions would have set a dangerous precedent for Bitcoin’s reputation as an immutable and decentralized currency. Most believe that even attempting to take such actions would have failed miserably.

The two cases are different in that Ethereum was damaged as a blockchain while Bitcoin was never hacked and the incident occurred to the exchange. However, they are exemplary instances of how the two cryptocurrencies are different in terms of security, immutability and decentralization.

As long as Bitcoin’s community continues to stand by its strong protocol principles and consensus rules, it will be resilient to detractors and disingenuous attacks.

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