The crypto ecosystem has no shortage of jargon. Ambiguous phrases, acronyms and newly formed words that had almost no meaning a decade ago (or even a few months ago for many) are now widely used market signals informing strategic investment decisions. As Cryptocurrencies are natively digital, it is important to understand the vernacular, usage, and meaning of the digital vocabulary that has formed within the space.

Fork: Network Divergence

Blockchains’ decentralized and distributed nature has brought about countless innovations and new market opportunities that were purely imaginary just a few years ago. But the decentralized and distributed architecture also means that the maintenance and future development of a blockchain’s infrastructure is a shared responsibility amongst all participants.

A quick look through any history textbook may remind you how difficult it has been for anyone to stay in agreement about anything over any extended period of time.

Forks occur when consensus among the participants of a blockchain is lost. Because all parties must utilize the same consensus generating rules to maintain the blockchain, forks occur when this agreement has been violated, either accidentally or intentionally. Blockchains as old as the Bitcoin blockchain have seen countless forks over their lifetime and some of the largest cryptocurrencies today are forks from earlier projects such as bitcoin.

Let’s say you and your friends are playing a card game such as Poker that you all know and love. For the game to function, everyone must know and follow the agreed upon rules. Changes to these rules can and sometimes do take place (Twos are wild this hand!), but only when there is agreement amongst your friends that these changes can take place. If there is no consensus about these changes, two versions of the game may take place at different table, with one group choosing to follow the old rules while another chooses to adopt the new rules.

Accidental forks happen more often than most crypto participants may realize, as two or more miners find a block at the same time. It is only after more blocks are added to the chain that the network will abandon the (now deemed to be invalid) blocks of the “orphaned” chain and follow the longest chain. This longest chain is the chain that has the most “work” put into it and is therefore deemed to be the most valid. Satoshi Nakamoto anticipated these sorts of accidental forks and covered this concept since the inception of blockchain in the original bitcoin whitepaper.

Intentional forks can be further broken down into two categories: soft forks and hard forks.

Soft forks are software upgrades to a protocol that still allow them to stay backwards compatible. Both old nodes that have not upgraded their software and new nodes that have are still able to recognize new transactions. A soft fork is a change to the protocol itself rather than the end product (the cryptocurrency). It is important to know that no new cryptocurrency is being created from a soft fork, because there is no separate version of the blockchain suddenly being created either.

Hard forks occur when there is an upgrade to the network such that the nodes validating blocks will see blocks as invalid. Hard forks mean that previously valid blocks are invalid or previously invalid blocks become valid. Hard forks are complete network splits where there are no transactions or communications flowing between the two now separate chains in the end. All validating nodes must make a choice about which version of the blockchain they will follow from this point moving forward. One choice is to follow the old network protocol as things have been done before, while another choice is to follow the now revised blockchain and set out on a new path. Two separate blockchains will exist as the end result of a hard fork.

Hard forks create a new cryptocurrency or version of the blockchain. They may happen because of rifts in the project team, the desire to follow a different vision for the project or a hack that creates clear division within the community. Bitcoin Cash, Bitcoin Gold, Bitcoin SV, and Litecoin are some notable hard forks that have created new cryptocurrencies from the world’s oldest blockchain.

Daniel Pinto - Market Analyst @ TradingBull.io

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