Photo: iStock
Photo: iStock

What is forking and how does it impact cryptocurrencies such as bitcoin

Forking happens because a set of miners, who create bitcoin, believe that there are more efficient options than the existing bitcoin

In the world of cryptocurrencies, especially bitcoin, you will often hear the word ‘forking’. So far in bitcoin, two major forks have taken place, which have led to the birth of two cryptocurrencies—bitcoin cash and bitcoin gold. Yet another forking is expected next week. Let’s try to understand forking and its impact.

Forking happens because a set of miners, who create bitcoin, believe that there are more efficient options than the existing bitcoin. Forking implies a splitting of the chain on which bitcoin runs; making it go in a different direction—with different rules than the existing blockchain as the two would now have different visions of bitcoin. “For example, bitcoin cash changed the block size, which means that blocks can be greater than 8 MB while bitcoin continues with 1 MB blocks. When the miners disagree with the existing rules of bitcoin, the blockchain forks or splits into two different blockchains which have different rules," said Sumanth Neppalli, cryptocurrency and blockchain analyst, Zebpay.

There are two kinds of forking. “Hard fork is a permanent divergence in blockchain. If a bitcoin hard fork happens, then it is possible that the older bitcoin blockchain will be scrapped in place of the upgraded one. This means that all nodes—of miners, merchants and users— will need to upgrade to the new nodes to be able to validate the new blocks. This is necessary as non-upgraded nodes will reject blocks created by upgraded nodes," said Benson Samuel, chief technology officer and co-founder, Coinsecure. In case of soft fork, there are only protocol changes and bitcoin continues to work on the original blockchain rules. According to Samuel, to date the following coins have or will soon emerge after software client fork of bitcoin core: bitcoin XT, bitcoin classic, bitcoin unlimited, bitcoin cash, bitcoin gold, SegWit2x, litecoin, dash and zcash.

In August this year when forking took place, it gave rise to bitcoin cash. When the hard fork happened, all the bitcoin holders got bitcoin cash credited to their account. However, not all bitcoin companies and exchanges provide bitcoin cash since it takes time to implement bitcoin cash on the platform. In case of bitcoin gold (forking happened in October), not all users were credited with bitcoin gold. Besides the difference in size, these new cryptocurrencies also have different price. “Individuals who were holding bitcoin at the time of the bitcoin gold hard fork were not necessarily credited bitcoin gold at the time of the hard fork. Bitcoin gold still actually has not been released to individuals. In terms of the price of bitcoin cash, it is a good deal lower than that of bitcoin. Bitcoin cash has not fully gained traction yet. We are yet to see what is to come of bitcoin gold," said Samuel.

Today miners and cryptocurrency service providers are divided on their views on forking. Majority of bitcoin miners don’t believe in increasing the block size and the new cryptocurriences that have hence branched out. And for a forking to be successful, a majority of the miners in the network have to come to a consensus.

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