3iQ Research Group: Blockchain Forks | 3iQ Corp.

Hard-forks and Soft-forks

It seems like every couple of months there’s news of a new “fork” in the Bitcoin network. For those who are relatively unfamiliar with cryptoassets, the concept of “forking” a Blockchain may seem threatening but the ability to fork is an inherent attribute of any and all open-source Blockchains and should be welcomed. Open-source software is any computer software whose source-code is made available to the public with the intent of allowing individuals to do whatever they please with said software. Bitcoin, Ethereum, and Litecoin are all built upon open-source software which provides transparency in the protocol’s operation in addition to allowing further software development in a decentralized manner. The open-source nature of these Blockchains also allows users to create what are known as hard-forks and soft-forks.

Hard-forks

A hard-fork is when the Blockchain is split, creating two Blockchains. The original Blockchain still operates under its original set of rules while an additional Blockchain operating under a different set of rules is created, stemming from the block wherein the hard-fork was implemented. This new Blockchain runs under a modified set of rules chosen by the developers of the forked Blockchain and both iterations of the Blockchain will run concurrently in perpetuity. Both Bitcoin Cash (BCH) and Ethereum (ETH) were born out of a hard-fork from their original Blockchains, Bitcoin and Ethereum Classic. Although drastically different in their reasons to fork, BCH being more contentious than ETH, both of the aforementioned Blockchains have been operating along-side their original counterpart and have become examples of a well executed hard-fork.

Soft-forks

A soft-fork is a backwards-compatible “addition” to the Blockchain’s protocol. This means the soft-forked Blockchain follows the rules of the original Blockchain in addition to following the set of rules belonging to the fork. This serves as a way to add features to the original overall protocol and does not necessarily require nodes on the network to undergo any software upgrades. As a consequence of that, the new soft-forked Blockchain’s adoption is not final and exists in proportion to the number of nodes running the updated software. If no nodes adopt the upgraded software, the soft-forked Blockchain will cease to be generated and the original Blockchain will continue on. If the majority of nodes choose to implement the upgraded software, the new Blockchain will continue on while the original’s blocks will become orphaned. By implementing soft-forks, developers are able to advance the tech underlying the Blockchain of their choice and is seen as a method to improve existing coins.

What are the implications of a fork for token-holders of the original Blockchain?

Whenever a Blockchain is forked, the resulting Blockchain is essentially a clone of the original Blockchain that operates under a different set of rules. Thus, any token-holders of the original Blockchain will also own the same number of tokens on new Blockchain as well given that they are holding those tokens when the fork is implemented (given the tokens are generated at a 1:1 ratio). For a soft-fork, users may treat the Blockchain as though it was never “forked” in that everything remains the same apart from the added features that the soft-fork implemented to the Blockchain protocol. In the case of a hard-fork, since two separate Blockchains will be “competing” against one another, token holders are given an equal stake in both Blockchains. For example, if a Bitcoin holder were to have 100 BTC prior to the Bitcoin Cash hard-fork, they would own 100 BTC in addition to 100 BCH following the fork. This inherent property of how Blockchain forks are implemented should give users ease of mind in that they do not need to perform any anticipative actions to have an equal stake in both iterations of the Blockchain. Having said that, although you are entitled to them, claiming the forked coins can be somewhat convoluted when holding tokens on the various exchanges and wallet clients available today. During previous forks there have been instances of exchanges or wallet clients refusing to give users access to their forked tokens, leading many to err on the side of caution and always hold their tokens in an a wallet where the fork will be supported. Most hardware wallet companies actively support forks and are a safe bet both in that they provide increased security relative to hot wallets and allow you to claim your tokens without needing to expose yourself to a less secure environment.

 

References:

bitcoinwiki. Hardfork. Retrieved February 12, 2018 from: https://en.bitcoin.it/wiki/Hardfork

bitcoinwiki. Softfork. Retrieved February 12, 2018 from: https://en.bitcoin.it/wiki/Softfork

Investopedia. Soft Fork. Retrieved November 20, 2017 from: https://www.investopedia.com/terms/s/soft-fork.asp

Investopedia. Hard Fork. Retrieved November 20, 2017 from: https://www.investopedia.com/terms/h/hard-fork.asp

 

 


Disclosure
This is for informational purposes only and does not constitute, either explicitly or implicitly, any provision of services or products by 3iQ Corp (“3iQ”). Investors should determine for themselves whether a particular service or product is suitable for their investment needs or should seek such professional advice for their particular situation.3iQ Corp. makes no representation or warranty to any investor regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. All content is original and has been researched and produced by 3iQ unless otherwise stated therein. No part of the content may be reproduced in any form, or referred to in any other publication, without the express written permission of 3iQ. All statements made regarding companies, securities or other financial information contained in the content or articles relating to 3iQ are strictly beliefs and points of view held by 3iQ and are not endorsements of any company or security or recommendations to buy or sell any security. No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. By visiting and/or otherwise using the 3iQ website in any way, you indicate that you understand and accept the terms of use as set forth on the website and agree to be bound by them. If you do not agree to the terms of use of the website, please do no access the website or any pages thereof. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with 3iQ with respect to any linked site or its sponsor, unless expressly stated by 3iQ. Any such information, products or sites have not necessarily been reviewed by 3iQ and are provided or maintained by third parties over whom 3iQ exercises no control. 3iQ expressly disclaims any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites. The information contained herein, while obtained from sources believed to be reliable, is not guaranteed as to its accuracy or completeness and confers no right on purchasers. Past performance of cryptoassets is not indicative of future performance and should not be used to forecast any return that an investor may realize.

2018-03-08T16:16:15-04:00 February 18th, 2018|