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What is a Fork ? Can Bitcoin be endangered by a Fork ? Read for thought

by | Dec 12, 2019 | 0 comments

This article is intended for readers who have already acquired a certain level of knowledge in the field of Blockchain and cryptocurrencies. If the article seems indigestible, do not hesitate to choose another difficulty in the box below wink

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What is a Fork  ?

A fork is a divergence to the protocol from the previous version of the blockchain.  In a blockchain, forks are justified by the different stakeholders who should used common rules for validating blocks.

What is this for ?

-If you wish to launch your own crypto currency, a possible solution is to launch a « Hard Fork* » from an existing  blockchain.

– Otherwise,  a « Hard Fork » is often the only way to conciliate opposite opinions  within a blockchain community.

These forks may occur for several different   reasons that are :

Intentional

 

1/ Blockchain protocol rules changes .  The main  frequent reason is a deliberate change  of the source code to improve it or to make it evolve . In other words, if you want to change the rules of a protocol such as the maximum block size, update security rules, or create a new crypto asset from an old one, you must perform a fork to create a new branch.

2/ Splitting a blockchain in 2. It can happen that  a new block is generated by a rogue miner, then  the system reaches consensus that this block is not valid, and this ‘orphan block’ is very soon abandoned by the other miners.

Unintentional

3/ a situation during when 2 blocks at least get the same bloc number

Typology

There are two main types of  forks. Additionally, we can mention the “Codebase  Forks”. Let see what it means :  

Hard Fork

Hard forks are deliberate, and occur when there is a major difference of opinion within the community which has built and sustained a particular blockchain, and one (or both) of the camps decides to go their own way. The group that disagrees with the original protocol ‘forks’ off its own version of the blockchain and the members who believe in this fork upgrade their systems to work on this new blockchain, leaving the previous one. Nodes (miners) running the previous blockchain are not accepted by the new blockchain. Users who prefer the old version can keep their systems and nodes working on it. This will then create (1) two competing blockchains, or (2) all the nodes will consensually agree the new blockchain and accept to work with the new protocol.

Let’s look in more details and distinguish 3 different types of hard forks :

 

(1)  HF Contentious

Caused by disagreements in the community,   forming a new block chain. This usually involves major changes to the code.

 (2) -HF planned  : In this case , we have a scheduled upgrades to the network, giving users a chance to be  prepared. These forks typically involve abandoning the old chain.

To  these two cases, (3)  we can add the specific case of “Spin off coin”  that  is shared changes to  the code that create new coins (Bitcoin’s example with  Litecoin and key changes included reducing mining time from 10 minutes to 2.5 minutes, and increasing the coin supply from 21 million to 84 million.In fact, Litecoin and Bitcoin are running with the same mining programs following the code changes).

Therefore, one can imagine the  blockchain with forks as a tree, and the  successive hard forks that seem to create new branches.(see the map of Bitcoin forks at the end of the article).   

Soft Fork

Like hard forks, they involve two version of a blockchain. However, unlike hard forks, users can keep running the old version after a soft fork, and still be part of the same network as the users who have upgraded to the new version.

Original blockchain in blue, and the forked version  in red. Both can exist simultaneously.

Codebase Forks

Codebase fork is a software development term. When a developer works on the source code of an application (it could be blockchain-based, or another software product) to develop (or create) a distinct and separate version of the software, the new version is called a codebase fork.

It is ultimately the decision of the network’s users whether or not they want to upgrade. Developers cannot force changes. They can only suggest changes and users decide whether to adopt them or not. On the blockchain, too, the fate of codebase forks is in the hands of users. To summarize, the codebase forks allow developers to modify the code without changing all the blockchain protocol.

 

The major Bitcoin Forks

Bitcoin, the pioneer blockchain cryptocurrency, has had several forks. Recognizing  the original Bitcoin blockchain (called Bitcoin Core) introduced by Satoshi Nakamoto, developers have made changes to Bitcoin Core’s blockchain protocol.  Forks of Bitcoin Core that happened are the following (see the Bitcoin forks map):

Bitcoin XT: August 2015

Bitcoin Clashic: February 2016

Bitcoin Unlimited: May 2017

Bitcoin ABC : This is a codebase fork intentionally incompatible with original Bitcoin iterations. Then Bitcoin ABC gave birth and established Bitcoin Cash in 2017.  

Bitcoin Cash: (August 2017) As an objective the increase in theory the number of transactions per second with a higher bloc size

Bitcoin Gold and Bitcoin Diamond : (October- November  2017) Alternative mining algorithm to allow users to mine at a cheaper price.

Bitcoin SV : Fork of Bitcoin Cash, with higher block size than Bitcoin Cash

SegWit2x (BTC): Few developers proposed a hard fork protocol called SegWit2x aiming to convince all Bitcoin protocol users. The project has failed.

Conclusion – What impacts do forks have on ?

When a hard fork is  performed, holders and miners of a quantity of the original currency will receive both the token of the new protocol as well as the old one.

For example, when you fork Bitcoin Cash if you had 1 Bitcoin at the time of the fork you will hold 1 Bitcoin and 1 Bitcoin cash after the fork.

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If there is no consensus in the community, investors and miners are  split between the two existing projects and hold the two tokens.

For Bitcoin or any project, all these hard forks could  have been seen as a long-term threat because part of its market capitalization is dispersed over the other altcoins projects. But in fact, despite apparent technological improvements, the effect of  forks have been diluted. Because forks only correspond to 5% of the entire Bitcoin tree for less than 3.5% of its total capitalization (see chart).

 

Finally, Bitcoin has never been so strong. It is possible to see a Bitcoin hard fork to, one day, take over the core project and propose an improvement in technology. But for now, Bitcoin remains the winner, thanks to its age and track-record, its strong community, its visibility and its unequalled safety empowered by the number of miners. Forks are mutations that allow the development of this booming technology. They are a sign of the vitality of the blockchain technology.

About the editor…

A passion : Economics, behavioural finance and emerging digital assets

Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group  before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).

He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.

Yves Maillot

Financial markets and asset management

Yves Maillot

Financial markets and asset management

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