As a cryptocurrency user and investor one important topic that will always remain and constantly crawl up every once in a while are cryptocurrency forks. These happen all the time but do you know what a cryptocurrency for is, and are you positioned to profit from forks?
In this article we will be explaining what a fork is in cryptocurrency, the types of cryptocurrency forks, a look at previous successful and failed forks and how you can position yourself to take advantage of cryptocurrency forks when they happen.
So without wasting any time let’s get started already.
What is a Fork in Cryptocurrency?
Don’t get it twisted, the fork we are talking about is not your usual fork spoon with a two to four teeth which you use for eating.
In cryptocurrency, a fork refers to a significant change in the software architecture of a blockchain which may or may not lead to a split of the network.
You can compare a fork to a coup and a coup d’état. A coup usually resort to using peaceful means of exiting an incumbent leader while a coup d’état resorts to the use of violence in the ousting of an incumbent from office.
In simple language, a fork is just a fancy name for a blockchain software or a protocol upgrade.
The outcome of a cryptocurrency fork and the means used in effecting the fork determines what kind of fork we would call it.
Types of Cryptocurrency Forks
Basically there two (2) types of cryptocurrency forks:
- Hard Fork
- Soft Fork
What is a Cryptocurrency Hard Fork?
As stated earlier, forks are significant changes to a blockchain code. A hard fork leads to the blockchain being split into two different network that will coexistent independently of each other even though they’re both of the same originating code.
A cryptocurrency hard fork refers to any blockchain protocol change or software upgrade that renders the old rules obsolete and switches to the use of new codebase.
Usually, this form of fork stems from disagreements among key members of the blockchain community who fails to come to a consensus on which specific direction the network should go.
In the end, one faction of the community goes ahead to forcefully implement a controversial change of which the other faction will not approve and usually will elect to run with the previous code before the change.
This leads to an old and a new version of the same blockchain that will henceforth operate independently of each other and even pursue extremely different goals and development programs in the future.
Forks create an alternate version of the blockchain, leaving two blockchains to run simultaneously on different parts of the network, depending on which type of fork is happening.
It is important to note once a cryptocurrency hard fork is successfully implemented, a rollback to the previous blockchain or system is no longer possible.
More so, not every hard fork will lead to a split of a blockchain into two. In a situation where the community unanimously agrees to make the significant software upgrade, the old blockchain will simply be dropped and will die a natural death as members move on with the new code as envisaged with Ethreum migration to Ethereum (ETH) 2.0.
What is a Cryptocurrency Soft Fork?
Cryptocurrency soft forks are less disruptive network upgrades or changes in the code base of a blockchain, similar to fixing patches and bugs in regular software.
These changes or normal network upgrades can be reversed or rolled back by a majority decision without serious implication to the network stability and security.
Usually, soft forks are optional upgrades with possibly multiple alternatives whereas a hard fork is usually a necessary change that once made will no longer be compatible with existing code and system, thus leading to the old code base being discarded in favor of the shining new one or some disgruntled community members simply takes over the old blockchain and run their own coin on it.
In a soft fork, the new rules do not make the old rules obsolete. It only polishes and refines them or simply remove bugs.
Examples of Past Cryptocurrency Forks
Below are a few examples of past cryptocurrency forks for a better understanding.
- Bitcoin Cash Fork of Bitcoin
An aggressive upgrade of the Bitcoin Code was implemented by a few community members lead by Roger Ver and implemented on 15 November 2018; leading to the creation of a new Bitcoin network and coin called Bitcoin Cash (BCH). This was the first-ever bitcoin hard fork and the beginning of the forking business.
- Bitcoin Satoshi Vision Fork of Bitcoin Cash
Craig Wright the faketoshi (Fake Satoshi) was a part of the Bitcoin Cash community but fell out with the leadership and decided to fork Bitcoin Cash to create his “real bitcoin” called Bitcoin Satoshi Vision (BSV) which was implemented on 15 November 2018. Bitcoin Gold and Bitcoin Diamond are similar Forks of Bitcoin. These coins were a split from the original bitcoin code.
- Ethereum Classic (ETC) Fork of Ethereum (ETH)
On 20 July 2016, Ethereum Classic was forked from Ethereum as a result of an irregular change to the codebase implemented by the Ethereum Foundation in an attempt to recover a $50 million funds stolen by hackers from the Decentralized Autonomous Organization (DOA) System.
- Ethereum Constantinople Hard Fork of Ethereum
This is a perfect example of a hard fork that doesn’t necessarily lead to a split of the network. Ethereum Constantinople hard fork was implemented on 28th February 2019, featuring improvements to network efficiency and fee structure, as well as, upgrades that pave the way to the development and launch of the much-anticipated ethereum 2.0 in 2020.
- Hive Hard Fork of Steem Blockchain
A more recent and prominent hard fork is the fork of the Steem blockchain to form Hive Blockchain.
What is the Difference Between Hard Fork and Soft Fork
The main difference between a cryptocurrency hard fork and soft fork is backward compatibility.
- A hard fork is a permanent change to the blockchain structure and is not backward compatible. On the other hand, a soft fork are changes that are compatible with the existing blockchain.
- Hard forks are radical and permanent changes to the blockchain rules whereas soft forks are cosmetic changes to the rules to implement useful improvements to the code base.
- Most hard forks lead to a split of the parent blockchain into two. Soft forks never results to a split, but rather an improved network.
- Hard forks are irreversible and non-backward compatible. Soft forks are backward compatible.
How to Make Money Taking Advantage of Cryptocurrency Hard Forks
Every hard fork leading to the creation of two blockchains leads to the existence of two separate coins. Members of the community and investors who hold some of the old coins are automatically gifted the new coin created out of the old coins.
Thus, if you hold say 100 Steem coins before the fork to Hive Blockchain, you will automatically receive an airdrop of 100 Hive tokens -just like that.
Free money right? YES!
More so, smart investors don’t just make money off the airdrop of new coins resulting from a fork.
Usually, when a fork is announced, people rush to buy the cryptocurrency involved so that they can receive the extra coins and possibly double their crypto wealth.
As a result of this sudden demand for the cryptocurrency, the prices usually goes north. Take Steem for an example that went up by more than 200% in about 24 hours after the news of the proposed fork was released.
You can leverage this information to buy in early and sell your holdings immediately the fork happens. This is because once the fork is done and everyone gets the new and free cryptocurrency, the price of the original coin almost always falls drastically due to people cashing out.
Therefore, you can end up with the extra new coin and a good profit from the sale of the old coin –that is assuming you get the timing right. You can only get the timing right if you get the right information at the right time.