A fork in cryptocurrency is a change or upgrade to blockchain network rules which usually leads to the network splitting into two.
However, not all forks cause a network split.
In this post, I will be sharing with you what a cryptocurrency fork is, the types of forks, previous successful forks and how to make money from forks.
What is a cryptocurrency fork?
A fork in cryptocurrency is a blockchain network software upgrade that changes the rules of its operation.
A fork is simply a blockchain network upgrade.
Blockchains like every other piece of software, are still a work in progress. As a result from time to time, upgrades are required to keep the software up to date with developments.
These upgrades are usually aimed at:
Making the network faster
Increase the capacity to process more transactions or data
Add features and functionalities that were previously non-existent.
These are are some of the major reasons why forks are executed. And forking is a normal part of maintaining a piece of software.
Types of cryptocurrency forks
There are two types of forks:
And their major difference is that hard forks lead to a chain split but soft forks don't.
Let's discuss both of them below.
1. Soft forks
A soft fork is a backwards-compatible blockchain network upgrade that does not create a chain split.
Now, remember, blockchain networks are protected by nodes who run the blockchain software and verify that blocks mined and transactions confirmed by miners followed the rules of that blockchain.
When a transaction or mined block is flagged to have deviated from the set rules it is considered invalid or rejected by the network. And it wouldn't be added to the chain of previously mined blocks.
A fork renders old rules obsolete. As such all nodes need to update their software to include the upgraded rules.
Otherwise, they will see any new blocks mined after the rules upgrade as invalid which would lead to a hard fork.
However, when the majority of nodes upgrades their software to accommodate the new rules we say it is a soft fork.
In a soft fork, most nodes agree with and move forward with the new rules. And all new blocks are verified based on the new rules.
2. Hard forks
A hard fork is a backwards-incompatible blockchain network upgrade that leads to a chain split and the existence of two different cryptocurrencies and independent chains.
In a hard fork, old nodes see all new transactions after the upgrade as invalid.
If a sufficient number of nodes and minders decide to keep running with the old rules and discard the new one, a new chain is inadvertently created and a hard fork is said to have occurred.
Past successful cryptocurrency forks
There's been hundreds or even thousands of cryptocurrency forks as any developer can pick any open source software and fork it to create their own project.
For example, SushiSwap is a hard fork of Uniswap and PancakeSwap is a hard fork of SushiSwap, etc.
So anyone can fork any open-source project to create their own.
However, the two most popular and successful forks resulting from disagreements among members of the community are the Bitcoin vs Bitcoin Cash and Ethereum vs Ethereum Classic forks.
How to make money from cryptocurrency forks
You can make money off of anything if you know how to, and cryptocurrency forks are no exception.
There are two tried and tested ways you can make money off of cryptocurrency forks.
By buying the rumours and selling the news
Buy holding the original coin to get the new one free
1. Trade the event
Usually, when a fork is going to happen, it would be announced ahead of time and a date and time or block height number at which it will occur will be given.
From the day this news is made public, most people will be buying the coin in order to receive a free airdrop of the new one.
This will cause the price of the coin to rise considerably until the snapshot is taken.
To make money with this event, you need to buy as close to the first day of the news as possible and sell the coin in the middle of the FOMO.
For me, I would normally sell 3 to 5 days before the snapshot to avoid being dumped on by smart money.
Prices of both the old and new coin will usually crash after the snapshot is taken or the new token is distributed and you can make a nice profit by trading the event and selling at the top of the FOMO.
But you will miss the airdrop.
2. Claim the airdrop
And anyone who holds the original coin will usually receive an equal amount of the newly-created coin.
If you believe the new coin will have a chance at succeeding and that both of the old ones can maintain their value even after the fork, then it is safe to buy it, hold and get an equal amount of the new coin for free.
For example, if you had 100 BTC in 2017 before the BCH fork, you would have received 100 BCH in addition. Absolutely free money.
However, if the prices of both the old and new coin crash after the fork, you will be losing money.
So weigh the potential outcome carefully and choose your strategy. And if you're the type that likes to play it safe you can split your capital into two and work with both strategies.
You could be lucky and win big in both ways at the same time.