DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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With the cryptocurrency world attracting new users everyday, the crypto world has got to upgrade itself every now and then so as to not crash from using the same old ideas and technology.
The most essential part in the operation of the cryptocurrencies are the blockchain networks. Every blockchain network needs to bring itself up to speed if any of its functions go out of date and start causing problems to the users.
So to make upgrades to a blockchain, forking is used. This article will tell you all about what a fork is, what are its types, why they are used and a few examples. So let us get started.
The blockchain networks in the crypto world are decentralized and that means that the users of the network can have a say as to how the blockchain operates. Blocks on the blockchains are added using the individual computer nodes and when a unanimous consensus is reached amongst these network nodes, one single blockchain with verified data is formed.
It often happens that all the nodes in the network can't come to a consensus about the future of the blockchain and that can lead to forks. A single blockchain splits into two where both the original and new chain remain valid.
The fork formed can be of three different types and may have different properties than the original blockchain. The types of forks will be covered later in this article, along with examples of blockchains that have undergone forks.
In simpler terms, a fork is formed whenever a community wants to change the basic rules of blockchain like consensus mechanism which is then followed by a split in the blockchain. Both branches may or may not have the same basic principles and are independent of each other.
So far we have seen that fork is fundamentally splitting the blockchain into two separate chains. But why does the fork occur in the first place? What is the purpose of a fork in blockchain? Why do developers and community members decide to fork a blockchain?
Well, consider the fork like a software update your smartphone gets. You can download various apps to tweak already existing functions of your phone. But it's the software update which brings new features, fixes security issues, and various bugs within the system.
In a similar manner, a forking is used to improve the blockchain from its core. The following are the 3 primary reasons a fork takes place.
In a way, it won’t be wrong to say that blockchains are still in the research phase. We are still experimenting and trying to figure out what technologies work best for us. Therefore, any blockchain may have certain vulnerabilities or bugs within the blockchain which can be fixed by creating a fork.
Technologies and requirements from a blockchain changes with them as more and more people start using it. Therefore, developers may want to add certain features to facilitate a better transaction experience or remove unnecessary features from blockchain.
A blockchain is immutable by nature and fork helps it to maintain these characteristics. If any suspicious and fraud transactions are detected in the blockchain, a community can create a fork which will discard all the suspicious transactions made within a specific time period.
There are many cryptocurrencies which do not have their own blockchain. Instead, they work on an already existing blockchain. Thus, developers who want to create a new cryptocurrency without having to create a new blockchain can opt to fork an existing blockchain and develop their cryptocurrency on it.
Any fork created can be classified into one of the following three categories: Hard fork, Soft fork and Temporary fork.
The main characteristic of a hard fork is its backward incompatibility. When any upgrades are made in the principle set of rules of a blockchain, the original blockchain no longer recognizes the blocks minted as per new protocols.
Thus, all the nodes need to be on the same software version in order to see the new blocks. This creates a new network or a cryptocurrency that is independent of the parent blockchain. For example, Bitcoin cash is created by the hard fork of the Bitcoin blockchain.
Soft fork on the other hand is backward compatible. Here, the changes and updates made to the blockchain are still considered valid by both new and old nodes. A soft fork will make changes in blockchain software without splitting it into two.
Thus, a soft fork is a helpful method to add or remove features from an already existing blockchain. Soft forks can be activated by both the users and miners and will be implemented once it gets adopted by all the users.
A temporary fork is not created willingly but it is one that is accidentally created by miners. Miners are responsible for verifying and adding new blocks to the blockchain. However, it is possible that two miners may add a block at the exact time which creates two blocks instead of one in the timeline of a blockchain.
When it happens, the original blockchain gets split into two and continues to proceed further. Both the blockchain continues to run for a while as the network decides which one they want to continue with.
Eventually, the temporary fork becomes dead once the majority of people on the network agree to go with a particular blockchain.
Hard Fork and Soft Fork are the only two types of forks that are considered as Temporary fork is more of an error. Both types of forks are quite comparable and serve different sets of purpose. Let’s take a quick look at the differences between hard fork and soft fork.
We have examples from two largest cryptocurrencies in the world viz Bitcoin and Ethereum which will help us understand Hard fork and Soft fork better. Bitcoin has undergone both types of forking but we will consider Bitcoin for soft fork and Ethereum for hard fork.
Ethereum is the most talked about cryptocurrency in the world because of its features and limitations. The original Ethereum blockchain offers a smart contract ecosystem that is irreplaceable and thus developers stick to it in spite of the limitations offered by the same blockchain.
However, to overcome its limitations, a couple of soft forks of Ethereum's blockchain are created. Ethereum classic is one example of a hard fork you can see right now, whereas another hard fork named Ethereum 2.0 is still in process.
The Ethereum 2.0 hard fork will shift the consensus protocol from proof-of-work to proof-of-stake where the original Ethereum blockchain will continue to run along with its new fork.
The Bitcoin blockchain has undergone a soft fork a number of times. The first time soft forking was done to add pay-to-script hash (P2SH) to the Bitcoin network. The soft forking only added this much-needed feature to the blockchain but didn’t create a split in the blockchain.
Bitcoin network’s SegWit update is another example of a soft fork where new features were added to the Bitcoin network. With the segWit update, another hash named Bech32 was incorporated into the network.
Now with both of these soft fork updates, the Bitcoin network can handle both P2SH and Bech32 class of addresses.
A blockchain fork is a process of either updating the existing cryptocurrency networks or creating new ones. Both types of forking are common in the crypto space and help the project teams to keep the cryptocurrencies up to date with new technologies.
We hope you understood what a blockchain fork is. There are many other concepts like forking which might interest you. Feel free to check them out on the HyperGrowth blog and keep exploring the crypto space.
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