Cryptocurrency users get to see a strange sort of fluctuations in the prices that are the cause of a phenomenon within the cryptocurrency world called a fork. We’ll try to understand what exactly the fork phenomenon is and why it happens.
Cryptocurrencies are named so because of the system they belong to and how it works. The digital form of currency is generated by the solution of complex cryptographic puzzles. Once they’re solved, the data is put together into blocks and the blocks are linked together in a chain after the completion of every block forming a blockchain.
The first cryptocurrency was Bitcoin which introduced the blockchain system and since its introduction, hundreds of blockchain networks have since followed.
The blockchain is essentially a ledger that contains the history of all the transactions that have been made with the cryptocurrency. One major advantage of the blockchain system is the fact that it’s a decentralized peer-to-peer system which eliminates the involvement of a central authority that gets a piece of the pie for every transaction that has to take place like through the credit card companies and banks in the fiat currency system.
What Causes Forks?
Forks can happen for one of two possible reasons. The first form of fork that can happen is called an accidental fork. That happens if the updates on the ledger are not compatible with each other. When people are using different versions of the same software, the ledger that’s being maintained tends to split. One forms from the older version of the software and the other forms from the new version. If such a circumstance comes to pass, it has to be resolved by the development team maintaining the blockchain network. They will have to address the issues of compatibility causing the fork and once that is done, they must figure out a way to merge the two forking blockchains.
The second from of forking is called the hard fork. This is generated when the core team of developers of any given blockchain network decide that certain changes must be made to the entirety of the network. They could have many reasons for that. One possible reason could be to resolve a major problem that had not been faced before by the blockchain network.
An example would be the smart contract application Decentralized Autonomous Organization (DAO) getting hacked on the Ethereum network. DAO was created as a completely autonomous currency exchange system that worked by itself based on the protocols defined by its programmers. A hacker managed to find a loophole in the code of this application and managed to siphon off $50 million USD worth of Ether from the $150 million USD worth of Ether it had amassed. Even though the core team managed to restore the stolen amount, the fact was that he could possibly claim the money he had stolen because of the loophole he exploited.
A hard fork was done to roll back the Ethereum network to a previous day when DAO didn’t exist and the protocols for the whole network were changed to dissuade any future possibilities of that happening again.
Why are Forks Bad?
When two versions of a blockchain exist, only one can be considered the right one. The coin transactions in the wrong blockchain could become lost. This causes a great deal of stress to the cryptocurrency-community. Regardless of how important forks could be, the possibility of losing their coins can drive away investors and traders. It can always go south for the blockchain network and the cryptocurrency community but if the fork works out, it could be the best buying opportunity.