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What Is a Cryptocurrency Fork and How Does It Work?

Forks are a relatively common occurrence in the cryptocurrency space and usually occur when developers find blockchain bugs or when they are planning upgrades and updates on the blockchain.

Forks can happen as a result of different reasons such as protocol upgrades, changes in consensus, and division within the community. Here, we will walk you through the various types of forks and how they function to help you move efficiently through the cryptocurrency ecosystem.

Types of Forks

In the world of cryptocurrencies there are two main types of forks:

Hard Fork:

A hard fork is a permanent, irreversible change to the blockchain's protocol, which causes two incompatible results. The new version of the software is a pre-requisite for all nodes and miners of the network if they want to participate in the network otherwise they will be forced not to continue their activities in the network soft fork.

If there is no majority consensus among participants, After all, a hard fork means the community has to part ways, some with the original chain (referred to as the legacy chain) while others run with the new chain.

Soft Fork:

A soft fork is a change to the blockchain protocol where new rules are backward compatible with the old rules. With a soft fork, only a majority of miners and nodes need to upgrade to the new version of the software to enforce the new rules.

If they did not upgrade, their nodes will still consider blocks validated by upgraded nodes as valid blocks, so one way or the other we will have consensus on one chain. Soft forks are generally used to add new features or tighten consensus rules in the network while keeping the blockchain intact.

How Forks Work

There are a number of steps to forking a cryptocurrency blockchain:

Proposal:

A fork is a non-backward-compatible change to how a chain runs. A fork is typically suggested by developers and community members in order to address technical issues, add new features, or settle disputes within the community. The proposal covers the reasons for the fork, the modifications it involves, and when these changes will take place.

Consensus:

A hard fork needs to be a consensus amongst network participants, miners, developers, users, and node operators. This is an agreement on which most of the nodes agree and are willing to apply the new protocol rules after the update.

Activation:

After consensus is reached, the new protocol rules are deployed at a block height or time in the future. This is where the blockchain splits into two separate chains, diverging from each other and following their own rules (as in the case of hard forks).

After the new software is deployed miners and nodes using the new version will proceed mining and validating transactions on the new chain and those who either will not or cannot upgrade will be dormant and remain on the existing chain.

Migration:

Once the fork is officially activated, users and exchanges will need to properly migrate their funds and software onto the correct chain to maintain proper operation and continuity. Depending on the specifics of airdrop implementation this could mean wallet software updates, wallet support to claim tokens, tokens transferred to new addresses, or exchange pairs updated.

Adoption:

This run of the treadmill does not change the fact that the community must adopt and support a fork. If most participants recognize and go on to use and build the new chain, then the fork can become the thing most recognized as the 'chain' with the legacy chain not getting much use and fading into the background.

In the worst case, if there is a large single opposition, the fork can become a non-consensual fork, which will lead to a split and a situation where two different chains will compete for the members, causing unnecessary confusion in the ecosystem.

Implications of Forks

Forks can have different impacts on cryptocurrency users, developers, and the whole ecosystem:

  • Network Upgrades: A fork is used to upgrade the blockchain network with scalability improvements, security improvements, protocol updates, etc.
  • Community Governance: Forks create a way for community members to offer their feedback and have a hand in steering and growing the blockchain.
  • Chain Splits: Forks can result in chain splits as well as new cryptocurrency creation, leading to a wave of digital assets making it tough for users & investors to distinguish one from the other.
  • Market Volatility: A fork often increases market volatility, and during this chaotic period, the value of a cryptocurrency may swing wildly as investors respond to a changing ecosystem.

Conclusion

A Cryptocurrency fork is a permanent schism in the blockchain; A fork is what happens when a blockchain diverges into two potential paths forward. Forks are difficult or soft, which can be challenging for not supporting existing guidelines or for the possibility of a chain break.

Forks can be used to activate network upgrades and promote community governance but are also associated with challenges such as chain splits, market panic, and uncertainty. 

Comprehension of the derivatives of forks - and what forks actually are, as well as what is implied by existing forks - are all critical to creating the perfect currency backbone that you can use as a life preserver on the ocean that is the cryptocurrency ecosystem.

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