What is a Bitcoin Fork? The Ultimate Guide
Understanding what a bitcoin fork is requires some context.
Bitcoin (BTC, lowercase b) is a cryptocurrency on the Bitcoin (capitalized B) blockchain. It was described in a white-paper by Satoshi Nakamoto in 2008. As opposed to its counterpart, fiat currency, bitcoin is a digital asset that is created, stored, and exchanged on a distributed ledger system.
Blockchain is the technology that bitcoin relies on to prevent various issues that digital currencies face, primarily double-spending. As a peer-to-peer network, one of its central features is its decentralization: its existence relies on a network of computers—or nodes—that must reach a consensus in order for new block to be added to the chain.
The protocol and code that underlie the technology are often subject to disagreement amongst its users and programmers. Because the blockchain’s links all must use a uniform protocol in order to continue adding blocks, these disputes often lead to divergences.
In these instances, the original currency carries forward while a new currency (i.e., bitcoin cash) operates under new rules. Litecoin, released initially in 2011, was one of the first—and successful—spinoffs of bitcoin, having forked initially to decrease block generation time.
What is a Fork?
First, let’s discuss the term “fork” in technology.
A fork in software is the usage of one project’s source code and adapting it to a new, independent project.
Forks are extremely common in bitcoin. This is because cryptocurrencies exist on an open source blockchain making its code publicly available.
What is a bitcoin fork?
Specifically for bitcoin, a fork is an update to a blockchain.
Most forks take up a new name similar to that of the original and arise due to what has been dubbed the scalability issue. Proponents of these forks believe that particular cryptocurrencies will face difficulty as they grow due to their inability to handle greater numbers of transactions.
The location of a block on the blockchain is the block’s height. Forks are identifiable by the presence of two blocks at the same height and thus a fork occurs when the blockchain splits into two separate pieces: the result depends on the type of fork and the developer’s intentions.
Bitcoin Soft Forks Vs. Hard Forks
In blockchain, there are two different types of forks that can occur: a soft fork, and a hard fork.
A soft fork is an adaptation made to software that does not result in an entirely new blockchain.
With soft forks, not all nodes must agree to the adapted software nor enforce the changes to the “rules,” only a majority.
What does this mean?
To put it simply, let’s compare a blockchain to a one-way road called Cross Street. After traveling down the Cross Street, there is a split. To the right, you’re faced with a dead end. To the left, the road continues forward but adapts the name of Tower Street. The fork in the road allows the rule (the street name) to change while still following the same road. Cars can follow the new street name while still being in compliance with the original.
Just like roads, Bitcoin has experienced countless soft forks in order to implement new features and upgrade its software for greater functionality.
Slightly different than soft forks, hard forks keep the original cryptocurrency chain intact and continues on as before, while the new chain diverges to operate under its own rules and procedures.
In this case, all nodes must agree to the new version.
Here, the one-way road leads to another split. Instead of the road simply changing names, it now requires passengers to exit their vehicles and take a bus. Failure for all passengers to operate under this new rule leads to failure for the new chain.
Notable Bitcoin Forks
Bitcoin has experienced numerous forks, and many of these forks have undergone splits of their own.
Below are among the most prominent bitcoin forks:
Similar to gridcoin, the forked coin, litecoin (LTC), runs on the “scrypt” hashing algorithm. LTC is generated approximately four times faster—with block times of two and a half minutes—than that of the original coin, BTC. To date, LTC is the third-largest cryptocurrency by market capitalization.
Some of the primary reasons for its rapid adoption are its
- Quick transactions
- Inexpensive transactions
2. Bitcoin XT
Bitcoin XT (BXT) was designed for 8-megabyte blocks in 2014 to more than triple the number of transactions allowed per second. Although BXT is still available, it is largely considered an inactive currency. Despite gaining traction with over one thousand active nodes within one year of launch, BXT is critically deemed a failure.
3. Bitcoin Classic
After BXT lost user interest, developers proposed the fork bitcoin classic (BXC). This fork features only 2-megabyte blocks in the hopes of doubling transactions per second. Even though it would reduce transaction costs and fees associated with using BTC, BXC failed to operate with more than two-thousand nodes at its peak.
4. Bitcoin Unlimited
Again produced with intent to increase block size, bitcoin unlimited (BU) gives miners the ability to choose block size of those they validate in order to optimize the network.
5. Bitcoin Cash
Bitcoin cash (BCH) was created in 2017 as a product of a hard fork designed to increase block size limit and decrease block time. It is also referred to as bcash.
BCH is a controversial fork. It was developed due to the competing prospects of various factions within the cryptocurrency community. The most successful fork to date, BCH has consistently been within the top five cryptocurrencies by market capitalization.
6. Bitcoin Gold
Originally derived from BCH, one of the key features on the release of bitcoin gold (BTG) in 2017 was that mining requirements were reduced significantly insofar as much more basic equipment would be sufficient, rather than the specialized units BTC grew to necessitate for effective work.
7. Bitcoin SV
Bitcoin SV (BSV), formally named bitcoin Satoshi’s Vision, served to upgrade the original bitcoin script and increase the block size while still holding true to Nakamoto’s original tenets.
It’s important to note that even though some of these forks have proven unsuccessful, they played an important role in developing forks that stuck.
Bitcoin forks are they key to continuing to develop blockchain technology as institutions and consumers adopt blockchain into every-day use.
CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.