What is a fork?

Oftentimes, traders who are taking their first steps in crypto trading complain about the abundance of long and complex terms. They have the point, though. Here are some of them: blockchain, airdrop, obfuscation, staking, etc. There are plenty of similar and even more confusing terms that are used by crypto traders on a daily basis. No surprise they seem unintelligible to newcomers. Fortunately, there are concise definitions that help developers perfectly describe certain mechanisms of the crypto industry, e.g. a fork. It might sound odd but let us tell you why this is the best and most suitable word for this technical phenomenon.

Why is it called a fork?

A fork is a split of a cryptocurrency that forms a fork-like diversion from the main blockchain. Each new branch functions independently of the underlying project and may have different features.

A fork happens when developers take a copy of source code from the main project and start independent development on it, namely creating a new project. Hence, it means "to divide into branches, go separate ways" just like the original meaning of the word "fork". For a long time, all digital coins, excluding bitcoin, were called forks. The creators of new virtual assets used the BTC source code and made minor changes to it. Later, coins with unique codes, written from scratch, began to appear. They were called altcoins.

Types of forks

Overall, there are two types of forks: soft and hard. Their main difference, save for the emission rate, is the encryption algorithm.

A soft fork is a software upgrade for the blockchain where new blocks are compatible with the pre-fork blocks. A soft fork does not mean a new digital coin but rather an upgrade of the underlying coin. There are many reasons for soft forks, starting from the need for minor changes to improve the project or a large-scale code upgrade.

As for the main advantages of soft forks, crypto experts highlight the following ones:

Improving the functions of a certain blockchain network which enables developers to expand its application.

• Fixing bugs in the ecosystem.
• Boosting competition in the market: optimisation of one ecosystem leads to the upgrade of other assets.
• Giving users the right to choose whether to switch to new software. After the soft fork, the new algorithms are still compatible with the old ones.
• Canceling implemented changes if they lead to malfunctions and errors in the system.
• Notably, there are no disadvantages to soft forks, except that sometimes they cause minor bugs in the system.

Unlike a soft fork, a hard fork is a drastic change in the cryptocurrency, which splits it into two independent branches that are not compatible with each other. A hard fork always leads to the creation of a new digital asset because the original blockchain and new version follow the new set of rules. Since almost all virtual coins have open source code, the hard fork can be initiated by anyone – developers, miners, or large traders. Sometimes a hard fork of the cryptocurrency happens against the background of serious disagreements between community members.

As for the main advantages of hard forks, analysts stress the following ones:

A radical upgrade in the consensus algorithm, which makes previous blocks invalid.

• Opportunity to fix critical errors in crypto algorithms.
• Increase in the market cap of the asset. A new promising cryptocurrency appears in the market. Investors who buy a token immediately after the fork get a chance to make a solid profit.
• Opportunity to develop a winning trading strategy in advance. The hard fork of any virtual coin from the top 20 by market capitalization is always a significant event for the crypto community. It is widely discussed on forums and other social media platforms before a fork occurs.
• As for the drawbacks of hard forks, they can lead to a big conflict in the community. As a result, there are usually two opposing parties, advocating for and against branching. In addition, sometimes a drastic change in the cryptocurrency triggers its volatility in the market. There is a chance that investors may incur losses.