Bitcoin Forks & How They Work
The world of crypto has created lots of new terms for people to understand. One of the terms that I get asked about a lot is Fork — and before you ask, no, not the think that you eat your food with!
So in todays video, i will go over everything you need to know about the forks of bitcoin, explaining what a BTC fork actually is, and letting you know about some of the most popular and well-known forks of Bitcoin.
Fork? That is a strange name! What is it?
The simplest explanation is that a fork is when somebody makes a copy of the Bitcoin blockchain code, and makes changes to it. Perhaps the code is being changed due to security reasons, or because improvements are being made — but what ever the reason, if a change is made, then this creates what is known as a fork.
It is also important to note that there are 2 different types of blockchain forks. The first is known as a ‘soft fork’ and, the second is, you guessed it, known as a ‘hard fork’.
So — a bitcoin fork is an edited copy of the bitcoin block chain?
Yes, a bitcoin ‘fork’ is a change to the bitcoin software, that creates a separate version of the blockchain, albeit one that shares the history. When this happens, a new digital currency — the forked version — is created.
What’s a Hard Fork?
Firstly, the biggest difference between a soft fork and a hard fork is the extent to which the update is respected by miners.
What that means is if all miners agree to the new rule of the blockchain, and from then forward only validate blocks that respect it, then there is no need for a new chain to split off. However, if miners do not agree around the rule change, then some miners will continue to validate blocks according to the old rules, while others will validate according to the new rules. this means that blocks mined by each group will be incompatible with the other, resulting in a hard fork.
Ok — so what is a Soft Fork?
A soft fork is simply when the software protocol is changed in a minor way. A soft fork is known as “backward-compatible” because although old transactions are no longer valid, new transactions are recognized by both old nodes and new nodes.
Do I need to care about forks? I mean, are they important?
There are a number of reasons why investors need to know about Bitcoin forks.
Firstly, you may want to switch over to the new rules and the new coin because you assess that it’s better than using the original Bitcoin.
Secondly, there is always the chance that the new fork could have an impact on the Bitcoin community or even Bitcoin’s price, impacting your investment.
Thirdly, it may be possible for you to profit from the fork, by selling the new coins that can be claimed by every Bitcoin holder at the time of the fork.
That third point perhaps could benefit from an anology. Just imagine that you are playing a game, and that you have been playing for a long time. As a result, the players of the game have all accumulated a lot of points.
But then, somebody suggests that they want to change the rules of the game, but wants to ensure that the points that everyone has already won are not lost.
To make sure that nobody loses their points, they decide that a new game, with the new rules will start and that everybody playing the old game, will start the new one with the same amount of points they did before the rules were changed. So if a player had 200 points in the original game, when they joined the new game, they would begin with 200 points.
How does that work with crypto?
Well, when a fork occurs, the people who decide on forking Bitcoin will say “we don’t like the current blockchain rules — we want to change them, so starting from block number 580,301 the new rules will be implemented”
Then, once that agreed block is reached, all Bitcoin holders will now have two types of Bitcoins: the original one and the new one.
Holders of the currency will have an amount of forked Bitcoin that is equal to the amount of original Bitcoins in their possession at the time of the fork.
So if you had 10 Bitcoin in your possession when the fork occurred, you won’t lose them, and you will still have 10 bitcoin. BUT, adn this is an important bit, you will also be able to claim 10 of the “new Bitcoin” on the network that’s running the “new Bitcoin rules”. Once you claim your new coins, you can then hold on to them or sell them. Most wallets and exchanges have systems setup to enable you to claim these new forked coins, if they feel it is of significant value to their clients.
In other words — thanks to forking you can basically generate money for nothing; all you did was claim coins from thin air and sell them on an exchange.
Great — how many bitcoin forks are there?
A lot! Over a hundred in total, of which 74 are active as of February 2021. Whilst this is far too many to cover in a single video, I will recap some of the most popular or well established bitcoin forks we have seen over time.
1) Bitcoin Cash
During 2017, a number of Bitcoin developers decided to perform a hard fork of the Bitcoin client. This resulted in a completely new cryptocurrency and blockchain being created called Bitcoin Cash.
The rationale behind this split was because the group felt that Bitcoin transaction fees were becoming too expensive, as they had increased from less than a cent in 2009, to a few dollars per transaction by 2017.
The Bitcoin Cash blockchain was launched on 1st August 2017, and as with BTC, its supply is restricted to 21 million coins.
2) Bitcoin Gold
Bitcoin Gold is a fork that was launched during October 2017. The people behind bitcoin gold had the intentions of making Bitcoin more “decentralized”, and Bitcoin Gold installed a new mining process that makes sure that specialized and expensive hardware cannot be used to increase somebody’s chances of winning the mining reward.
Anyone holding Bitcoin at the time of the launch received an identical amount of Bitcoin Gold, and since its launch, it has performed well.
Unfortunately, during May 2018 Bitcoin Gold experienced a “51% attack”, meaning that a group of individuals gained 51% of the total blockchain hashing power. This resulted in over $18 million of Bitcoin fork BTG coins being stolen and converted at a third party exchange.
3) Bitcoin Private
Bitcoin Private is another fork that was launched in March 2018, however, in the case of bitcoin private, it wasn’t a direct fork of the original Bitcoin.
Let me explain!
Bitcoin Private was forked from a blockchain called ZClassic. ZClassic itself was forked from a blockchain called ZCash. And ZCash was a blockchain that was forked from the original Bitcoin. So Bitcoin Private can think of Bitcoin as its great great great grandfather!
The founder of Bitcoin Private was Rhett Creighton, who was also behind the earlier fork ZClassic. Rhett wanted to combine the privacy and secrecy of ZClassic with the security and popularity of Bitcoin, hence the creation of bitcoin private.
As with the other Bitcoin forks we have covered, anyone holding bitcoin at the time of the launch was given the same amount of Bitcoin Private. Furthermore, anyone holding ZClassic was also awarded the same amount of the new coin, meaning that of you were lucky enough to be holding both bitcoin and Zclassic at the time, you would have received Bitcoin Private coins twice!
4) Bitcoin Diamond
The final big fork that we will speak about today is Bitcoin Diamond. This coin was directly forked in November 2017, from the original Bitcoin blockchain, with the purpose of allowing users better anonymity.
Interestingly, Bitcoin Diamond distributed their coins in a slightly different way to the other Bitcoin forks we have discussed, as it increased the supply and the amount holders received. So, where as other forks maintained a total supply of 21 million coins, Bitcoin Diamond increased this by 10 times. This meant that if you held 10 bitcoins at the time of the fork, you would receive 100 Bitcoin diamond.
As I mentioned there are many other Forks, including Bitcoin SV, United Bitcoin, Monero Classic, and their worth is only based off the success of the project and the network effect that the users create.
Well guys, that wraps up our video, explaining about bitcoin forks. I hope that you found the video interesting and informative. Please do let us know about which are your favourite bitcoin forks in the comments section below.
Until next time, I’ll see you on Crypto Money Life.