What is Crypto Forking and How Does It Affect the Crypto Price?
Blockchain technology, known to be one of the most secure and reliable technologies today, is the power behind most cryptocurrencies like Bitcoin and Ethereum. Thanks to the blockchain, the efficiency with which cryptos operate has led to their mainstream adoption as payment options in internet-based product and service platforms like online casino sites.
In case you were wondering, blockchain technology is a distributed database that is shared among nodes of a computer network. In addition, blockchain is decentralized in nature, meaning that it is open-source and relies on communities to maintain and develop its underlying code. But then, as is the case with many communities that are tasked with making decisions, not everyone will have a similar philosophy on the trajectory the blockchain should take. This is where a crypto fork comes in. Read on to discover what crypto forking is all about and how it affects the value of cryptocurrency.
What is a Crypto Fork?
A crypto fork occurs when a community decides to make changes to the blockchain’s basic rules of operation. A crypto fork results in the splitting of the blockchain which consequently results in a second chain. This second chain, while it shares part of its history with the original one, decides to head off on a completely new trajectory. Forks are quite common in the cryptocurrency industry, especially during the growth stages of the various cryptocurrencies.
Hard Fork Vs Soft Fork
A hard fork is what many would refer to as the revolutionary type of fork. This is because a hard fork is a backward-incompatible software update. The nodes in a hard fork add a new set of rules that are entirely incompatible with the old set of rules. As a result, the blockchain entirely ends up splitting into two. On one end exists a node that is clearly for the new rules while the other node sticks to the old rules.
A soft fork is the complete opposite of a hard fork. It involves a backward-compatible upgrade. This means that as opposed to the hard fork where we saw a clean break in the operations of the nodes, upgraded nodes can still communicate with the non-upgraded ones. The addition of a new rule in a soft fork does not clash with the older rules.
How Does a Crypto Fork Affect Crypto Price?
As you might have already deduced, forking indeed have a major impact on various cryptocurrencies. Past crypto forks have eventually led to large price fluctuations that have led to a lot of controversies in the crypto world. The general perception about forking is that it is meant to increase the notional value of a cryptocurrency while ensuring that the cryptocurrency’s network remains secure.
This isn’t always the case though. Take for instance blockchain hard forks which contradict the general price rise theory associated with crypto forks. They initially cause the price of the blockchain to rise, then after a brief period, the rise falls on a steady decline. In Ethereum’s case, however, a hard fork has been known to increase its price by more than 10 percent.
Notable Forking Examples
There have been several forking examples in the crypto world. Some of the most notable to date are as follows:
- The Bitcoin Cash Fork – The Bitcoin Cash fork came to be as a result of a disagreement in the bitcoin community. The Bitcoin platform as you’d expect was created to accommodate a larger block size and to accommodate more transactions. After its initial fork from Bitcoin, Bitcoin Cash undertook yet another fork in 2018. This time, it split into Bitcoin Cash Satoshi Vision (SV) and Bitcoin Cash ABC. The 2018 disagreement was a result of a change in protocol updates that incorporated larger block sizes on Bitcoin Cash.
- The DAO Hack – Associated with Ethereum, the DAO Hack represents another historic occasion that led to a hard fork arrangement. Launched in 2016, the Decentralized Autonomous Organization raised $150 Million worth of Ether through a token sale. It was then hacked because of vulnerabilities in its code base. After the hacking, a hard fork was proposed and implemented to recover the stolen funds. Not all parties were in agreement with this decision though, resulting in a split of the network into two blockchains namely, Ethereum and Ethereum Classic.
- Bitcoin XT – Bitcoin XT was launched by Michael Hearn in 2014 to include several new features he had proposed. For instance, he wanted the number of transactions allowed by the original version of Bitcoin to go up from 7 to 24 per second. To do this, it was proposed that the block size be increased from one megabyte to eight megabytes.
A crypto fork most definitely can affect cryptocurrency prices. However, history has shown us that those price changes might fluctuate depending on several other factors. For instance, how does the cryptocurrency community view that fork? The perceived value of the fork also helps to determine what price it will go by after things have settled down.
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