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Have you ever wondered what the heck someone is talking about when they mention Bitcoin forks? To many, just the thought of Bitcoin or digital currencies is enough to bewilder. Throw in the terms blockchain technology or Bitcoin forks, and you might as well be speaking a foreign language.
Continue reading if you have no idea what a Bitcoin fork is or if you have some idea but want to learn more. Benzinga provides enough information in this article to clear up confusion. You’ll stop feeling perplexed and be able to talk about forks with confidence.
What Is Forking in Cryptocurrency?
When learning about cryptocurrency forks, the first thing to understand is that they come in 2 types: soft fork and hard fork. When someone mentions crypto forks, they are talking about when a blockchain splits into 2 separate blockchains.
© Image credit: Coinbase
For anyone not familiar with this technology, a blockchain is open-source software. It is what powers cryptocurrencies like Bitcoin or Ethereum. A blockchain is a digital ledger made up of a string of data blocks, in which each new block that forms only becomes valid after the previous block has been confirmed. A blockchain is transparent and permanent, allowing anyone to view transactions back to the genesis block.
A soft fork is when new features or functions are added to a blockchain, but the rules the blockchain must follow are not changed, thus maintaining a single chain. As long as all users adopt the changes, they become the blockchain’s new set of standards.
Soft forks are seen as safer than hard forks and are also backward compatible, meaning that nodes or computers that do not upgrade to the new version will still see the blockchain as valid. Think of a soft fork like a software update for your PC or mobile phone’s operating system. In contrast, a hard fork would be like changing to an entirely new piece of hardware.
A hard fork is when there is a complete divergence from the previous blockchain. This change leads to a separation of the blockchain with 2 different versions of the blockchain running separately. An example of this would be Ethereum and Ethereum Classic, with Ethereum Classic being the original blockchain. In this case, the new blockchain, Ethereum, was more widely adopted and thus became the more dominant chain.
Hard forks happen for various reasons, such as to fix critical security issues, to add new functionality or to reverse previous transactions in the event of a hack. Once again, Ethereum and Ethereum Classic are good examples of this transformation. Ethereum created a hard fork to reverse transactions from a Decentralized Autonomous Organization (DAO) hack.
Hard forks also result from a disagreement in a blockchain community about the future of the blockchain. A good example of this situation is Bitcoin and Bitcoin Cash. Bitcoin Cash was forked off of the Bitcoin blockchain because of a concern about the scalability of Bitcoin. Some Bitcoin developers and miners wanted to increase the block size, allowing for more data to be processed at once, which would speed up the transaction verification process. When developers and miners could not agree, the Bitcoin blockchain was hard forked creating Bitcoin Cash.
When Was the 1st Bitcoin Fork?
Now that you have a better idea of what a cryptocurrency fork is, let’s look at the first Bitcoin fork. Bitcoin XT is considered the first major fork of the Bitcoin blockchain. The fork occurred in late 2014 as a way to add several new features. One of these features was to increase the block size from 1 megabyte to 8 megabytes. The reason for increasing the block size was to increase the number of transactions per second from 7 to 24. Bitcoin XT initially saw some success with more than 1,000 nodes running in the summer of 2015, but users lost interest over the next several months, and Bitcoin XT faded away.
The most successful Bitcoin fork to date is Bitcoin Cash. When Bitcoin developers could not agree on how to solve Bitcoin scalability issues, the blockchain was hard forked, creating Bitcoin Cash. The hard fork was also a result of a disagreement between developers over Segregated Witness (SegWit). SegWit changes Bitcoin transactions by separating signatures and scripts from the input and output data. This change allowed more transactions to fit into each block, thus increasing the throughput. Bitcoin Cash currently has a market capitalization of over $11 billion, making it the 21st most valuable cryptocurrency on the market.
History of Bitcoin Forks
Of the 105 Bitcoin forks, 74 are active projects and 31 are historical and no longer relevant. Below is a chronological list of the most notable Bitcoin forks.
Bitcoin XT: Created in late 2014, increased the block size from 1 megabyte to 8 megabytes. The goal was to increase the transaction rate.
Bitcoin Classic: Came into existence in early 2016, similar to Bitcoin XT but only increased the block size to 2 megabytes.
Bitcoin Cash: Split off of the Bitcoin blockchain in August of 2017 partially in response to Segregated Witness and from a disagreement between developers about block size.
Bitcoin Gold: Created in October of 2017, the goal of this hard fork was to restore mining with basic GPU miners.
Here’s a list of other Bitcoin forks:
- Bitcoin Diamond: November 2017
- Super Bitcoin: December 2017
- Bitcoin Atom: January 2018
- Bitcore: November 2017
- Bitcoin God: December 2017
- Bitcoin Private: January 2018
- Bitcoin Zeo: September 2018
- Bitcoin Post-Quantum: December 2018
Bitcoin Cash, Bitcoin Gold & Bitcoin SV
This section examines 3 cryptocurrencies that came into existence by way of hard forks, including why and when the hard fork occurred and how they differ from each other.
Of the 3, Bitcoin Cash was the first created (August 2017) when there was a disagreement between Bitcoin developers over the planned integration of Segregated Witness and Bitcoin’s block size.
Bitcoin Gold was the next, created on Oct. 24, 2017, when a group of Bitcoin developers became concerned about the centralization of Bitcoin mining by major mining operations, using specialized equipment (ASIC Miners). Bitcoin Gold changed the proof-of-work algorithm from SHA-256 to Equihash, which is ASIC (application-specific integrated circuit)-resistant. This change allowed miners to profitably mine Bitcoin Gold using GPU (Graphics Processing Unit) miners, which are far less expensive than the ASIC miners. The goal was to decentralize the mining of Bitcoin Gold.
Bitcoin SV (Satoshi’s Vision) launched on Nov. 15, 2018, through a hard fork of the Bitcoin Cash blockchain. The developers who instituted the hard fork believed that Bitcoin Cash did not go far enough in solving the scalability issues that Bitcoin faced. The Bitcoin SV community also believed that Satoshi Nakamoto’s only intended scalability-oriented change to Bitcoin’s original protocol would be to increase the block size. Initially, Bitcoin Cash followed this vision, but when Bitcoin Cash developers started making structural changes to its protocol, Bitcoin SV developers initiated the hard fork. Bitcoin SV was originally designed with a block-size limit of 128 megabytes but has increased to 2 GB block-size limits to increase transaction speeds.
Is Forking a Blockchain Bad?
Finally, are blockchain forks good or bad? In reality, the answer is probably somewhere in between. They are not the end of the world, but forks are also not a great thing either.
On the negative side, a fork can lead to a centralization of ideas by dividing the community along ideological lines. In most instances, diversity of ideas is positive for a project’s long-term viability. Another negative is the blockchains’ hashing power division. Miners have to choose which blockchain to mine, causing the pool of miners to be divided between the 2 blockchains. The fork can also potentially lead to 1 entity controlling a majority of the hashing power. A miner that controls more than 51% of the hashing power could abuse this power by censoring transactions or performing a double-spend attack.
Also, since hard forks give Bitcoin holders a proportional amount of their new tokens, some large Bitcoin holders may support a fork to get free cryptocurrency –– not because the fork is an actual improvement on Bitcoin’s blockchain.
On the positive side, forks can be a way to foster innovation and add improvements to a blockchain. If a developer community is hopelessly split and has a contentious relationship, a fork can be a way to allow each group to focus on their vision for the network. A hard fork can also be positive by rolling back transactions from a hacker that stole millions of dollars worth of cryptocurrency.
How To Buy Bitcoin
The easiest way to buy Bitcoin is by opening an account at Coinbase Global Inc. (NASDAQ: COIN), Interactive Brokers (IBKR) or eToro. IBKR or eToro would be the best choice for those who also wish to trade or invest in stocks.
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Is Bitcoin Still King?
The answer is yes. Bitcoin is still the king of all cryptocurrencies. Even though there have now been 105 Bitcoin forks, none have even come close to Bitcoin’s success. Adoption of Bitcoin by retail investors continues to grow, but even more importantly, institutional adoption has ramped up over the last 12 to 18 months. Bitcoin continues to have the most robust network and best security of any cryptocurrency.