Why are cryptocurrencies forked?

This is post seven in the series looking at cryptocurrencies, blockchains, tangles, bubbles and other interesting concepts like mining, forks and paper wallets and forks are the focus this time.

What is a fork?

CoinVedi

Well, yes, but that is not quite the right image.

Shepherd Press

Ah, yes, that’s closer.

Disclaimers:

  1. Neither the author nor WhaleOil are Registered or Authorised Financial Advisors and nothing written here should be construed as advice to buy or sell anything.  
  2.  The author owns a few cryptocurrencies, so is likely to be biased.

Some commentators see currency forks as a weakness when they can be a strength.  Forks are a reasonably common feature of software.

The GNU/Linux is an open-source operating system kernel that has forked a number of  times since its creation giving rise to Redhat Linux, Debian, Ubuntu, Fedora, Kali, CentOS and so on. Each version of Linux has its own particular strengths and weaknesses and people are free to choose based on their specific needs.  

Just to make things a little trickier, there are soft forks and hard forks.

Just like a fork in the road, a currency fork results in two paths. The technology behind the currency is usually the work of a group of co-operating developers.  A subset of the developers may see a potential problem with the underlying structure, the transaction time is too slow, the security is not strong enough, or whatever.

They propose a change to the structure to deal with the problem that they see, or foresee. If the whole development community agrees with them then a change is made to the underlying structure and a soft fork ensues.  It is pretty transparent to the users and coin holders.  Sort of like swapping documents created in MS Word 2013, with someone using MS Word 2016.  No one notices.

If, however, there is no consensus among the developers and two strong camps form, each advocating that their technology is better, then a hard fork can occur.  This is closer to trying to swap and edit documents between MS Word 2007 and MS Word 2016.

But just too complicate things a little more,  a hard fork can be used to keep the same coin with major changes to the blockchain, or to create a new coin.

If a new coin is created then all the computers that connect to the cryptocurrency’s network (the miners, the exchanges and so on) must upgrade to the latest version of the protocol software if they want to use the new coin or blockchain.  Or they can stay as they were to maintain the existing protocol if they want to use the old coin or blockchain.

See, dead simple!

As the previous post in this series said, a curious byproduct of a hard fork in a digital currency is that it creates “free stuff”.  If you owned Bitcoin before the fork and control your private keys, the same private keys can be used to spend your newly minted Bitcoin Cash.  This means a holder of 3.6 BTC  before the fork had in their digital wallet 3.6 BTC and 3.6 BCH after the fork..  

The key (pardon the pun) phrase is “control your private keys”.  The place where your cryptocurrency is stored before the hard fork is critical.  If it is stored in an exchange (bad idea, more on this later) you may or may not get the free coins. If your cryptocurrency is stored in a digital wallet then you benefit.  Digital wallets, exchanges, off-line storage, paper wallets etc are topics for another post.

Forks are a little bit like a share split, but not really.  If you are holding 10 shares in WhaleOil Inc and they are worth $5.25 and WO Inc decides to split 5:1 then you end up with 50 shares worth $1.05, no change in your asset.  In a coin fork there is no guarantee that the total value of your holding will be the same after the hard fork.  Usually it is more, but the market may decide that the two resulting coins now, both, have deficiencies and a price drop results.

The concept of a currency fork is one that needs to be understood when entering the cryptocurrency world.

For a fabulous, if slightly long-winded analogy of the benefit of a fork read this article.


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In solidarity with the those in the world’s most despised demographic, WH has decided to ‘come out’ as an old white male. WH enjoys exercising the white-male privilege that Whaleoil provides for him by writing the occasional post challenging climate change consensus; looking at random tech issues that tweak his interest, as a bit of a tech nerd; or generally poking the borax at anyone in public life who goes on record revealing their stupidity. WH never excelled on the sports field because his coaches never allowed him to play in his preferred position on the right-wing. WH also enjoys his MG.

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