Bitcoin forks are an essential aspect in the world of cryptocurrency, representing upgrades or changes to the Bitcoin protocol. Forks can significantly impact the blockchain resulting in the formation of new cryptocurrencies or improvements to the existent systems, which can in turn influence the Bitcoin price.
Understanding the underlying infrastructure is crucial to crypto success, so we’ll explore what Bitcoin forks are, the various types, and their implications.
What is a Bitcoin Fork?
A Bitcoin fork is a split in the Bitcoin network that gives birth to two separate branches, each of them with its own protocol. While one branch will continue following the pre-fork protocol, the other will follow a new protocol with a different set of rules.
Types of Bitcoin Forks
There are two categories of Bitcoin forks: hard and soft forks.
Hard Bitcoin Forks
These forks result in a new blockchain protocol and product. The protocol formed can’t be reversed to the original blockchain code. Additionally, it’s incompatible with the older versions, and after the user upgrades to the new software, it functions as a parallel branch of the primary blockchain.
Bitcoin Classic and Bitcoin Cash are some of the most common Bitcoin hard forks.
Soft Bitcoin Forks
Unlike their counterparts, soft Bitcoin forks result in less significant changes to the blockchain code. The protocol formed can be reversed to the original code. Since users of the new code are still able to interact with those of the old ones, soft forks are referred to as backward-compatible.
Some examples of Bitcoin soft forks include Taproot and Segregated Witness.
What causes Forks?
So, why do Bitcoin forks happen?
First, they can be accidental, although this rarely happens. An accidental fork occurs when two miners simultaneously mine a block. Resolving this type of fork requires the addition of subsequent blocks. When one of these blockchains grows longer than the other, the network discards the shorter chains, labeling its blocks ‘orphaned.’
Intentional forks are sometimes executed to address or correct a protocol’s history following a major bug or hack. For instance, in 2016, a third-party application on the Ethereum blockchain, known as the DAO, was hacked. This resulted in the theft of millions of dollars’ worth of ether (ETH).
To eliminate this hack from Ethereum’s ledger and return the stolen funds to their rightful owners, Ethereum developers initiated a hard fork. This created a new ledger that excluded the hack and restored the stolen ether, becoming the primary Ethereum blockchain. On the other hand, the original ledger, which still had the hack, continued as the Ethereum Classic (ETC) blockchain.
Benefits of Bitcoin Forks
Given the frequent failures of many Bitcoin forks post-launch, you might be wondering how an end user can benefit from them. One major motivation for supporting most Bitcoin forks besides enhanced transaction operations is the opportunity to get free coins. Although these coins aren’t completely free, understanding the market dynamics during forks can result in significant gains.
In simpler terms, a hard fork results in the formation of a new cryptocurrency. Following this, owners of the original Bitcoin can claim an extra amount of the new coins.
Here’s how to claim your Bitcoin fork assets:
- Hop on a Platform that Supports the Fork: Before the launch of the fork, ensure you join a platform that supports the fork. Your best choice here is to get on an exchange.
- Wait for the Fork Chain to Go Live: Depending on the fork, the waiting time could take hours, days, or even months. Remember to familiarize yourself with the forked coin’s official website or Twitter handle so that you know when the chain goes live.
- Claim Your Coins: Once the chain goes live, that is your chance to claim your coins. To avoid running into issues during the claiming period if you have control over your private keys, download the new wallet and then synchronize the blockchain. Once this is done, copy your older wallet’s private key and import it to the new wallet.
- Come Up with a Plan: with your new coins in your wallet, you can decide whether to sell them or hold onto them till their value rises.
Do Bitcoins Cause Inflation?
Bitcoin forks don’t cause inflation for Bitcoin because they are an entirely separate asset. The tokens generated from a Bitcoin blockchain fork are neither interoperable nor fungible with Bitcoin’s native token BTC.
