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With the increased interest in bitcoin, it’s important to understand the technology behind this cryptocurrency and the factors that can influence its price. Discover everything you need to know about bitcoin forks, including the difference between soft and hard forks and what they mean for traders.
The term ‘bitcoin fork’ can be used to describe two types of events. The first is a change to its underlying software – a ‘software fork’. The second is a divergence in the cryptocurrency’s blockchain – a ‘blockchain fork’. The reason each of these events is called a ‘fork’ is because they present two or more potential routes for bitcoin to follow, much like a fork in the road.
The key to understanding forks is to know a little about how bitcoin and blockchain technology works. Put simply, bitcoin runs across a network of computers – each running the bitcoin software and maintaining their own copy of the blockchain file.
For bitcoin, the blockchain stores the entire transaction history for the network in chronological order; the most recent transactions are recorded in the newest block at the top of the chain, while the oldest are at the bottom in what is known as the ‘genesis block’.
Crucially, there is no central authority in charge of bitcoin’s software or the blockchain file. Instead, any update must be proposed by a user and approved by a network majority before it can take effect. Users sometimes propose different updates at the same time – or there can be a lack of consensus about a proposed update – so it is this system that can give rise to forks.
A software fork is what happens when a developer takes bitcoin’s source code, which is open source, and proposes changes to the protocol. There are two types:
A ‘soft fork’ is a ‘backwards compatible’ software update, meaning users running the old software will still recognise blocks created by computers that have chosen to update theirs, and vice versa. It is called ‘soft’ because both groups of users will continue to mine new blocks on the same blockchain, so there is no ‘hard’ line dividing them. As both groups of users remain part of the same network, a soft fork will never result in the formation of a new cryptocurrency.
A soft fork is considered complete once the majority of machines in the bitcoin network have updated their software. If this doesn’t happen, the minority group may eventually decide to abandon the proposed update, or move to implement a hard fork instead.
A ‘hard fork’ is an update that isn’t backwards compatible. This means that users running the old software will not recognise blocks created by those running the new software, and vice versa.
For this reason, hard forks usually lead to a split in the blockchain with a group of users effectively leaving the old network to form a cryptocurrency of their own. In this scenario, the new network takes an exact copy of the blockchain as it was at the point of the split, with both versions remaining separate thereafter.
Users who owned bitcoin at the time of the split can often claim new coins on the forked network. However, it can be risky to claim the coins if the new network does not include ‘replay protection’ measures – to prevent the old network from erroneously recognising its transactions (and vice versa) – as spending one set of coins could result in the loss of those on the other network.
Computers compete to generate new blocks in a process known as ‘mining’. A blockchain fork is what happens when two or more computers mine separate blocks at exactly the same time, creating two competing versions of the blockchain file at different points in the network.
This type of fork is generally resolved quickly because one of the proposed updates will propagate through the network at a faster rate than the other, soon becoming the consensus blockchain.
Any data contained within an ‘orphaned’ block on the rejected chain is returned to the pool of pending data to be mined again. For this reason, a bitcoin transaction should generally not be considered final until at least six blocks have been mined on top of the block that contains it.
Many traders pay attention to news regarding software forks for signs of where bitcoin’s price is heading. This is because technological updates – for example those enabling the network to process more transactions each second or reduce its energy consumption – could increase adoption and cause bitcoin’s value to skyrocket.
Alternatively, its price could fall if the network is unable to reach consensus on a popular update, or a hard fork occurs, as a new cryptocurrency could reduce demand for bitcoin.
As the bitcoin network has grown, transaction speeds have slowed and the energy required to mine new blocks has increased dramatically. Many users are now calling for updates to the underlying protocol.
In May 2017, a group of major bitcoin mining companies met in New York to discuss potential updates. They eventually agreed to implement a hard fork called ‘SegWit 2x’ to double the size of each block, in what was known as ‘the New York agreement’ (or sometimes ‘the Silbert accord’). However, the update was later cancelled – to avoid a network split – when it became clear that there was significant opposition.
As a result of this inertia, there were a number of other hard forks in the latter half of 2017 and the start of 2018. Here we take a look at some recent bitcoin forks:
|Name||Main features||Fork date||Block height (number of blocks at fork)|
|Bitcoin cash (BCH)||Increased the size of each block to 8mb – from 1mb for bitcoin – enabling it to process up to eight times more transactions per second.||1 August 2017||478,589|
|Bitcoin Clashic (BCHC)||A parody of bitcoin cash, named to sound like Sean Connery saying ‘bitcoin classic’. It too increased the size of each block to 8mb to improve network capacity.||1 August 2017||478,559|
|Bitcoin gold (BTG)||Incorporated a new algorithm to make mining accessible to all users, including those without specialist equipment, while reducing energy consumption.||24 October 2017||491,407|
|Bitcoin Diamond (BCD)||Increased supply to 210 million coins (from 21 million) and made major changes to the protocol to improve transaction speeds, user privacy (through encryption) and energy consumption.||24 November 2017||495,866|
|BitcoinX (BCX)||Much like bitcoin diamond, this cryptocurrency increased supply to 210 billion coins, and introduced smart contract functionality and encryption.||12 December 2017||498,888|
|Super Bitcoin (SBTC)||Added smart contract functionality and encryption, and increased the size of each block to 8mb.||12 December 2017||498,888|
|Lightning Bitcoin (LBTC)||Adopted a new algorithm to reduce the time taken to mine new blocks from ten minutes to three seconds, enabling it to process up to 24 million transactions per day.||18 December 2017||499,999|
|Bitcoin God (GOD)||Introduced ‘proof-of-stake’ mining to reduce energy consumption. It also added smart contract functionality, and increased the size of each block to improve transaction speeds.||27 December 2017||501,225|
|Bitcoin Atom (BCA)||Incorporated a hybrid mining model that includes proof-of-stake and the original proof-of-work model, which it claims improves blockchain security. Its team is also working to develop a system to reduce transaction costs and enable micro-payments.||24 January 2018||505,888|
|Bitcoin Private (BCPH)||An unusual cryptocurrency that was formed from a ‘co-fork’ of both bitcoin and zclassic (ZCL). It encrypts transactions to ensure that metadata including the sender and recipient remain private.||28 February 2018||511,346|
Fox BTC (FBTC)
|This cryptocurrency’s protocol increased supply to 27 million coins, and included a hybrid mining model, 10mb blocks and a target block interval of three minutes.||30 April 2018||520,419|
|MicroBitcoin (MBC)||This coin was created with the intention of lowering the cost of transactions and encouraging the public to mine with graphic processing units (GPUs).||28 May 2018||525,000|
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