Bitcoin hard forks – where’s the value?
What is the point of having Bitcoin Hardforks to produce other currencies e.g Bitcoin Gold, Bitcoin Diamond? Do these currencies have any value?
Ah, buzzwords. Every subject has them. And amongst all the cryptocurrency buzzwords little excites as much discussion, argument, controversy and excitement as forks.
Let’s quickly remind ourselves of
(a) what a fork is
(b) what a soft fork is
(c) what a hard fork is
What is a fork?
There are two categories of fork and it’s important that we don’t mix them up.
There are blockchain forks and there are software forks
Blockchain forks are the splitting of the nice, neat straight blockchain into two separate routes. One route is the original chain, the other is an off-shoot.
Transient blockchain forks occur regularly and are a part of a blockchain’s ordinary working. When miners find two blocks at roughly the same time some nodes validate one of the blocks while other nodes validate the other block – so you get two forks.
Which fork is the valid one is determined later as new blocks are added and one of the forks becomes the ‘longest chain’. The other, shorter fork is eventually abandoned and disappears – so the blockchain is no longer forked.
For this article we’re not concerned with transient forks.
Permanent blockchain splits are a whole different beast and they create new cryptocurrencies. I’ll explain more in a moment.
Let’s look at software forks.
A software fork takes place at the level of the blockchain’s underlying code – its ‘protocol’. The software change is basically a rule change affecting how blocks are mined/validated. Think of a software fork as an upgrade to an app on your phone or laptop. You switch on your app and a message comes up saying something like, ‘Update available. Install now?’
And you know the update is a bug fix or something to improve the running of your app. On the whole we accept the upgrade and get on with our lives.
It’s not always that straightforward when the blockchain software upgrades.
For a start, there are two flavours of software forks: the soft fork and the hard fork.
What is a software soft fork?
A software soft fork is backwards compatible. The upgrade will change some aspect of how mining and validating blocks will occur – but all blocks validated by nodes using the newer software version are also considered valid by nodes using the old software version.
However, blocks considered valid by nodes still on the old software version are NOT valid in the new software version.
If the majority of users (ie 51%) upgrade to the new software code then the new blocks will eventually form the longest chain; the chain created by users of the old code will eventually die off as it will be out-hashed.
If most users do not update to the new rules – that is, 51% or more of the total hash power continues to use the old software – then the original rules will carry the day. The software update effectively fails and the blockchain remains on old rules.
What is a software hard fork?
It’s a software change that is not backwards compatible.
A software hard fork can lead to a blockchain fork – a possibly permanent splitting of the blockchain into two separate blockchains.
Nodes still using the old software version will see all new blocks created according to the new rules as invalid. They will only validate blocks mined by miners also using the pre-update software. This effectively leaves nodes using the old rules stuck on their own blockchain fork.
To implement a hard fork without creating a blockchain-fork, all users must upgrade to the new software rules. Alternatively, they could all stay with the old software version. Whichever it is, they must all do it.
The thing is, not every node does upgrade to the new rules. Some rule changes are controversial – as described in our recent piece on the Ethereum DAO Hack, for example – and if some nodes decide to upgrade while others stay with the old version then the blockchain splits and you have two forks.
Forks aren’t necessarily created to produce new cryptocurrencies. They’re created to make what the developers believe are necessary improvements to the the blockchain. So a software update that creates new features on Bitcoin might not be backwards compatible – meaning that what we have is a software hard fork.
Nodes that accept the Bitcoin hard fork carry on mining the original Bitcoin. But nodes who do not upgrade to the new rules become a separate blockchain – and that new blockchain has its own cryptocurrency.
The point of the hard forks can be to fix what the developers consider to be serious shortcomings in the current protocol.
So, for example, the Bitcoin Diamond fork was created by two Bitcoin mining teams. Their stated aims with the fork was to remedy the following problems with regular Bitcoin:
- Bitcoin presents a high threshold for new members to mine Bitcoin
- BTC transactions are very slow to confirm
- Lack of privacy protection in BTC
Their approach is to increase the total supply of coins to lower the cost of participation threshold. They’ll also increase the block size to 8MB to increase transaction speeds and improve privacy through encryption.
Be aware that the claims of the new blockchain are just that – claims. If you’ve any thoughts of investing in the new cryptocurrency (or any cryptocurrency for that matter) you need to research deep and wide before committing your funds. This article certainly does not constitute advice in any way, shape or form.
So, do Bitcoin hard forks have any value? This article explains what cryptocurrency value is and ultimately these hard forks cryptocurrency’s value will be determined by its uptake by the general public and businesses.