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| April 25, 2024

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What is a Fork?

Digital currencies such as Bitcoin and Ethereum operate on decentralized, open-source software known as a blockchain. A fork occurs whenever a community modifies the protocol or the fundamental set of rules governing the blockchain.

Who Initiates a Fork and Why?

Initiation of forks is often carried out by developers within open-source blockchain networks. The flexibility of these networks allows developers to suggest and implement changes when they collectively deem it necessary.

This may involve proposing enhancements to the current chain, advocating for the addition of new functionalities, or reinforcing security features. Forks may also be prompted by efforts to address disagreements within the blockchain community, particularly when developers, miners, or users express dissatisfaction with the trajectory of the blockchain.

Types of Forks:

There are two major types of forks:

1. Soft Fork:

Visualize a soft fork as a software update for the blockchain. Once universally adopted by all users, it establishes a new set of standards for the currency. Soft forks are commonly employed to introduce new features or functions, usually at the programming level, to both Bitcoin and Ethereum. Since the outcome is a unified blockchain, these changes remain compatible with pre-fork blocks.

2. Hard Fork:

In contrast, a hard fork occurs when code modifications are so extensive that the new version is no longer compatible with previous blocks. In this situation, the blockchain undergoes a split, resulting in the original blockchain and a new version adhering to the updated rules. This division creates an entirely new cryptocurrency, giving rise to well-known coins like Bitcoin Cash and Bitcoin Gold, which emerged from the original Bitcoin blockchain through a hard fork.

Advantages of a Blockchain Fork:

1. Fostering Collective Innovation

In instances of disagreement over the blockchain’s direction, a fork enables developer teams to delve into novel ideas, potentially leading to innovations that benefit the entire cryptocurrency community.

2. Enhancing Competition and Liquidity:

The introduction of a new blockchain and coin intensifies competition within the sector, attracting fresh investments and ultimately contributing to increased liquidity in the cryptocurrency market.

3. Promoting Improvement and Value:

Successful technical enhancements and upgrades (soft forks) contribute to the evolution of a blockchain’s functionality, potentially driving heightened adoption of its technology and an increase in the value of its coin.

Significant Historical Hard Forks

Both Bitcoin and Ethereum have undergone notable hard forks. Here are two of the most renowned instances:

1. Bitcoin Improvement Proposal 91 (BIP 91)

During the initial phases of Bitcoin’s existence, scalability issues emerged due to the block size cap implemented by Satoshi Nakamoto, the pseudonymous founder of Bitcoin. The 1-megabyte cap posed challenges, including network slowdowns, restricted transactions per block, and elevated transaction fees.

2. The DAO Heist

In 2016, approximately one year after the launch of the Ethereum network by Vitalik Buterin, an entity introduced an investor-directed venture capital fund on the Ethereum network. This entity, known as “The DAO” or the Genesis DAO, was the inaugural “Decentralized Autonomous Organization.”

Shortly thereafter, a hacker or group of hackers exploited vulnerabilities in the smart contract, diverting 3.6 million Ether out of the 12.7 million initially raised—equivalent to approximately USD 70 million at that time—from the Genesis DAO.

Responding to this incident, the Ethereum community executed a hard fork to alter the blockchain history and return the stolen Ether to the original investors, effectively reversing all transactions on the entire Ethereum blockchain.

While this event brought significant embarrassment to the nascent Ethereum platform, the subsequent hard fork challenged the perception that cryptocurrencies were immutable, showcasing the community’s ability to address and rectify such issues.

Bitcoin Taproot Blockchain Fork:

A notable recent fork is the Bitcoin Taproot upgrade implemented in November 2021. The Taproot upgrade efficiently consolidates multiple transactions and signatures, resulting in a notable enhancement of the overall network’s transaction speed.