Knowledge base

What Is a Cryptocurrency Fork?

Often, newcomers to the world of cryptocurrency complain that the realm of digital coins is filled with long, complex, and unfamiliar terms. It is indeed so. Blockchain, airdrop, obfuscation, staking - the cryptocurrency glossary for novice traders today is full of such and even more original words. Fortunately, among all this splendor, there are concise and meaningful definitions that creators have used to perfectly describe certain processes in the crypto industry. One of the brightest of these is the word "fork," which, when translated from English, means "a fork." We will explain why there is no more concise and fitting definition for this phenomenon in the world of cryptocurrencies.

What Does a Fork Have to Do with It?

A fork is a split or divergence in a cryptocurrency where each new branch operates independently of the base project and may have characteristics that were not present in the original project. During a fork of a digital currency, the codebase of the software project is used as a starting point for another. Hence, the name of this phenomenon. "Fork" translates from English to "a fork."

For a long time, in the cryptocurrency community, all digital coins except Bitcoin were called forks. Typically, creators of new virtual assets used Bitcoin's source code as the basis and made minor changes to it. Later, currencies with a unique codebase, written from scratch, began to appear. As a result, these new coins came to be known as altcoins.

Types of Forks

There are two main variations of forks: soft and hard. The primary difference between them, aside from the speed of emission, is the encryption algorithm.

A soft fork is a gentle form of cryptocurrency divergence in which branches of the old version can interact with branches of the new one. As a result of a soft fork, no new digital currency is created; instead, it often involves a significant upgrade of the base.

When it comes to the reasons for soft forks, there are countless, ranging from the need for minor changes to improve the project to a significant change in the code.

Regarding the main advantages of soft forks, experts often mention the following:

  • Improving the functional qualities of a specific blockchain network, expanding its application scope.
  • Fixing flaws and bugs in the system.
  • Stimulating competition in the market: upgrading one system encourages the team of another digital asset to upgrade their creation.
  • Providing users with the choice of whether to switch to new software or not. After a soft fork, the new rules continue to interact with the old ones.
  • The ability to revert implemented changes if they lead to malfunctions and errors in the system.

At the same time, soft forks have no such disadvantages, except that they sometimes cause minor disruptions in the system. In contrast to a soft fork, a hard fork represents revolutionary changes to a cryptocurrency, resulting in its division into two separate chains that cannot interact with each other. A hard fork always leads to the creation of a new digital asset, as it introduces an irreversible operation into the blockchain.

Since almost all virtual coins have open-source code, anyone can initiate a hard fork - developers, miners, popular traders. Sometimes a hard fork occurs amid significant disagreements within the community.

Regarding the main advantages of hard forks, the following are often highlighted:

  • Significant changes to the network's algorithm, its evolution, resulting in the old version becoming obsolete.
  • The ability to fix critical errors in the cryptocurrency's algorithms.
  • Increasing the capitalization of the asset. A new promising cryptocurrency appears on the market, and investors who buy the token immediately after its launch have a chance to profit.
  • The opportunity to develop a winning strategy for traders in advance. A hard fork of any cryptocurrency in the top 20 by market capitalization is always a significant event for the crypto community, discussed in advance on forums and branching portals.

As for the disadvantages of hard forks, they often lead to the division of the community into two opposing camps, those in favor and those against the fork. Additionally, revolutionary changes to a cryptocurrency can trigger market volatility, potentially resulting in investor losses.