Crypto Basics: A fork in the road

In the last article, we briefly introduced you to the concept of a cryptocurrency fork; a spin-off of a cryptocurrency but with key design changes.. 

This article will explain the concept of forks in more detail looking at:

  • What is a fork?
  • How bitcoin agrees to change
  • Getting everybody on board
  • What happens during a fork, 
  • The consequences for holders of a forked cryptocurrency

What is a crypto fork?

Every now and then, you get a notification from your mobile bank app telling you to download an update, which may include bug fixes, improvements, and new features.

Updates of this type aren’t very controversial, since you don’t really have any influence over the changes. And if you refuse Barclay’s most recent update, you’ll soon start having security issues, or the app may just stop working.

But when it comes to updating cryptocurrencies, things aren’t that simple. In contrast to your banking app, cryptocurrencies like Bitcoin are open source and decentralised; so there is no ultimate decision maker.,  

Open source literally means that anyone can legally copy the computer code and repurpose it, making whatever changes they see fit.

This means that if a change to Bitcoin was proposed for which there wasn’t a consensus - an agreement - there is always the risk that someone will be determined enough to literally take the project in a new direction, by creating a fork.

So a fork is essentially what happens when a consensus can’t be reached about improving a blockchain’s design and function. It is a change in the design of a blockchain creating two paths, one of which nodes and miners need to choose, like meeting a fork in a road and deciding which route to take.

For a very simple analogy, think about your favourite band splitting - because of creative differences - and forming two separate groups.

Just as a band has different roles, so does a cryptocurrency; let’s meet them.

Who’s who in Bitcoin

There are four main roles in the Bitcoin ecosystem. These aren’t mutually exclusive, and there can be overlap between two or more roles.

  1. Developers
  2. Miners
  3. Full node operators
  4. Light node users

Developers

Software developers are in charge of creating, maintaining, and upgrading Bitcoin. The reference code, followed by most implementations, is called Bitcoin Core. 

Bitcoin Core developers are trusted and respected members of the community - but they are not all-powerful.

Any developer is free to contribute and propose changes via a formal process. These Bitcoin Improvement Proposals (BIPs) are debated within the community, and must reach an overwhelming majority to be implemented.

This effectively means that the bigger or more controversial the change, the harder it is to get everyone to agree. 

If a consensus is agreed the BIP is implemented and Bitcoin continues with the adjustment in place. If there is no agreement, the possibility of a fork emerges.

One of the most influential user groups that need to agree to implement a BIP are the Miners. 

Miners

Miners are crucial to the system. They are responsible for validating transactions and adding new blocks to the blockchain, getting newly created bitcoin as a reward. 

It wouldn’t be illogical to think that miners hold all the power. After all, they are the ones in charge of processing transactions and securing the network. 

Miners could try and make selfish changes to the code to increase block rewards, for example - but this wouldn’t fly well with most users (and presumably with developers), and would most likely not be adopted.

What this means in practice is that their power is limited, and their decisions are driven by purely economic motive. 

Full node operators

Anyone can run a full node, and some estimates put their numbers at around 50,000 worldwide. Full nodes maintain an updated copy of all transactions that ever took place in Bitcoin - that is, the full blockchain. 

They also verify the integrity of every new block that gets added to the chain. If at any time a miner tries to bend the rules and create invalid transactions, for example, full nodes will reject that block, and the miner will lose their rewards.

Full nodes also enable light nodes (explained below), and arguably the entire Bitcoin network. 

Running a full node has the advantage of enabling faster access to blockchain data (since they store the entire history locally). Most exchanges are also running full nodes, which gives them considerable financial weight in making decisions.

Full nodes don’t exert any active power in the network, but that doesn’t mean they’re powerless. Ultimately, adoption by the majority of full nodes is what determines the success of an upgrade because the number of Nodes correlate to growth of the Bitcoin ecosystem.

Light node users

Light nodes connect to full nodes in order to send and verify transactions, but they don’t have to store the entire blockchain. Light nodes are mostly Bitcoin wallets or other simple applications.

Light nodes make up for the overwhelming majority of regular Bitcoin users. Although they don’t have any direct influence over the network governance, their sheer number ensures that others are keeping their best interest in mind when making decisions - lest they simply cash out.

The power of each party is largely kept in check by economic self-interest. However, this doesn’t mean they always agree - and in extreme cases, this disagreement can lead to a fork that breaks up the network. 

Soft forks vs Hard forks

Not all changes in code require a fork, while changes in fundamental rules will inevitably lead to one.

There are two types of forks: soft forks and hard forks. 

What is a soft fork?

A Soft Fork is a code change that doesn’t break the rules of the old version - meaning both the older and newer versions of the software can still recognise and “talk” to each other, running together in the same network without a split.

One such example was the implementation of an improvement called Segwit on Bitcoin. This change optimised transactions without violating the rules that limited the maximum size of each block in the blockchain. 

What is a hard fork?

A hard fork, on the other hand, introduces changes that are incompatible with the previous version. It happens when agreement cannot be reached to implement a change or when a bug has been discovered that necessitates it - Ethereum is a good example..

Anyone running the old software will be unable to remain in the same network, as the new rules won’t be recognised by their version. This doesn’t mean the network will stop working; it just means that from that point onwards, there will be two parallel networks: one following the old rules, and one with the updated software.

This effectively splits one network into two, like a fork in the road. And then it’s up to that cryptocurrency’s ecosystem of participants (miners, holders, exchanges, stakers) to decide which path to follow.

What happens next depends on the community and on why the hard fork happened in the first place. 

Scenario #1: planned improvement with full agreement

The entire community is on board with the changes and updates their software. If this happens, the fork isn’t really a fork, as the entire network follows the same path. The old network dies out; end of story.

This scenario is likely to play out when the change fixes critical bugs, or when the improvement is considered beneficial to most of the community. One such example is a planned upgrade by the EOS protocol in 2019. But not all forks happen so smoothly.

Scenario #2: disagreement and contentious break

The community is divided and unable to agree on a change or improvement proposal, If there is enough momentum (and enough people on each side), then the network splits at the moment the change is implemented.

This is exactly what happened in 2017 when Bitcoin split, leading to the birth of Bitcoin Cash. 

At the time, with Bitcoin experiencing major transaction congestion, the community was torn about how to solve the problem. This heated debate raged for months, leading to a break in the community into two factions. Human tribalism at its earnest. 

Unhappy with the majority solution proposed by the Bitcoin Core team, one faction (which included several miners and notable community members) simply forked the code with their own change - and a new currency was born.

The rift effectively cloned the amount of bitcoin in circulation into the new network on a 1:1 ratio, This means that if you had 10 bitcoin before the split, you would still have the same 10 bitcoin (BTC) plus 10 bitcoin cash (BCH).

Even though the initial value of one bitcoin cash was only a fraction of that of a bitcoin, the combined price of one BTC and one BCH was greater than the previous price of the original.

This outcome was seen by many as having created “free money”. Inspired by this, a myriad other projects have since followed this path - to varying degrees of success.

Scenario #3: planned divergence

Sometimes the fork is planned from the start to become an entirely new cryptocurrency. Like an amicable divorce, each cryptocurrency goes their separate way and, from then on, evolve in a completely independent manner - with different features, goals or ideals.

It’s worth noting that, after the success of Bitcoin Cash, hard-forking became a strategy to bootstrap new networks. While some of the forks were legitimate and remain active today, some of them were merely experimental, or simply opportunistic, only ever intended to capitalise on the idea of “free money”.

Here are some examples of Bitcoin forks that, for one reason or another, have been stagnated, or never even launched

Altcoins & notable Bitcoin forks

While these splits have been widely criticised by purists - known in the crypto community as Bitcoin maximalists, as we’ll see below - forking lies in the very nature of Bitcoin. 

And so, starting in 2011, new cryptocurrencies began popping up. Initially, projects began by forking Bitcoin’s codebase (but without necessarily splitting the existing network), tweaking certain aspects of Bitcoin but not going too far from the original design. 

These new projects were given the name of “altcoins” - still used today to refer to any cryptocurrency other than Bitcoin.

One of the first such forks was Litecoin (LTC), which was designed to be “the silver to Bitcoin’s gold”, as per the words of its creator, Charlie Lee. As of today, Litecoin sits at #5 in terms of market capitalisation for all cryptocurrencies.

On the more contentious side, we’ve learned how Bitcoin Cash split from Bitcoin, spurring a new way of bootstrapping a new network by taking advantage of the existing network with the dubious promise of “free money.”

Dozens of other projects followed suit, like Bitcoin Gold, Bitcoin Diamond, Super Bitcoin, Bitcoin Atom, and many more - but most of them achieved very limited success. 

But forks can cut both ways. Ironically, Bitcoin Cash itself suffered a contentious hard fork in 2018, when one of its main advocates, controversial figure Craig Wright, broke up with the BCH core team and branched out - leading to Bitcoin SV (BSV).

There are literally hundreds of forks and forks of forks - not just from Bitcoin, but from other cryptocurrencies such as Ethereum or Ripple. And this list just keeps growing.

Bitcoin maximalism & going beyond Bitcoin 

And thus we go back to human tribalism. It’s in human nature to form groups, to take sides, and to fight with other groups. We see this on all kinds of scale: from family feuds, to football teams, to rival countries - and cryptocurrencies are no different.

So it’s not surprising that one of these tribes, perhaps the first one in the crypto community, is that of Bitcoin Maximalists

Although there’s no formal definition for what a maximalist (or just “maxi”) is, the term is generally used to describe someone who believes Bitcoin is the only true and pure cryptocurrency, and therefore rejects all (or most) others. Maximalists refuse to acknowledge the value of other use cases and to hold Bitcoin’s core principles as gospel.

Of course there’s more nuance to this, but that’s an extreme version.

This intolerance inevitably leads to lots of conflict - particularly noticeable on the main crypto channels, such as Twitter, Telegram and on forums like Bitcointalk. This behaviour doesn’t win cryptocurrency any favours, but that’s just human nature.

The truth is, Bitcoin was designed to be copied, modified, and grown into new experiments, and to evolve into solutions for problems we haven’t even considered yet. And there’s nothing stopping other types of cryptocurrencies to complement Bitcoin, improving upon it or making up for some of its shortcomings.

While the term cryptocurrency refers to money and the financial side of things, the technology lends itself to an infinitely broader range of use cases, as we’ll see in future lessons.

Next step: Building on top of Bitcoin

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