Cryptocurrency All-in-One For Dummies. Peter Kent
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What is a fork, and why do forks happen?
Sometimes when a group of developers disagrees with the direction a specific cryptocurrency is going, the members decide to go their own way and initiate a fork. Imagine an actual physical fork. It has one long handle, and then it divides into a bunch of branches. That’s exactly what happens in a cryptocurrency fork.
Some cryptocurrencies are implemented within open-source software. Each of these cryptocurrencies has its own protocol that everyone in the network should follow. Examples of such rule topics include the following:
Block size
Rewards that miners, harvesters, or other network participants get
How fees are calculated
Hard forks and soft forks
Two types of forks can happen in a cryptocurrency: a hard fork and a soft fork.
Most cryptocurrencies consist of two big pieces: the protocol (set of rules) and the blockchain (which stores all the transactions that have ever happened). If a segment of the crypto community decides to create its own new rules, it starts by copying the original protocol code and then goes about making changes to it (assuming the cryptocurrency is completely open source). After the developers have implemented their desired changes, they define a point at which their fork will become active. More specifically, they choose a block number to start the forking. For example, as you can see in Figure 2-1, the community can say that the new protocol will go live when block 999 is published to the cryptocurrency blockchain.
© John Wiley & Sons, Inc.
FIGURE 2-1: An example of a hard fork.
When the currency reaches that block number, the community splits in two. Some people decide to support the original set of rules, while others support the new fork. Each group then starts adding new blocks to the fork it supports. At this point, both blockchains are incompatible with each other, and a hard fork has occurred. In a hard fork, the nodes essentially go through a contentious divorce and don’t ever interact with each other again. They don’t even acknowledge the nodes or transactions on the old blockchain. See Book 2, Chapter 5 for more about correcting actions with a hard fork on a blockchain like Ethereum. (And if you’re curious about forking in the context of cryptocurrency mining, flip to Book 6, Chapter 8.)
On the other hand, a soft fork is the type of breakup where you remain friends with your ex. If the developers decide to fork the cryptocurrency and make the changes compatible with the old one, then the situation is called a soft fork. You can see the subtle difference in the example shown in Figure 2-2.
© John Wiley & Sons, Inc.
FIGURE 2-2: An example of a soft fork.
Say the soft fork is set to happen at block 700. The majority of the community may support the stronger chain of blocks following both the new and old rules. If the two sides reach a consensus after a while, the new rules are upgraded across the network. Any non-upgraded nodes (that is, stubborn geeks) who are still mining are essentially wasting their time. The community comes back together softly, and everyone lives happily ever after — until the next major argument, of course.
Free money on forks
Because a new fork is based on the original blockchain, all transactions that previously happened on the blockchain also happen on the fork. The developers of the new chain take a “snapshot” of the ledger at a specific block number where the fork happened (like 999 in Figure 2-1) and therefore create a duplicate copy of the chain. That means if you had a certain amount of cryptocurrencies before the fork, you also get the same amount of the new coin.
A FORKING EXAMPLE: BITCOIN VERSUS BITCOIN CASH
Even the celebrity of cryptocurrencies, Bitcoin (BTC), has seen forks. One of the well-known Bitcoin forks happened on August 1, 2017. That’s the birthday of Bitcoin Cash. In this case, the developers couldn’t agree on what the size for a block should be. Some wanted the block size to go from 1MB to 2MB, but others wanted to increase it even more, to 32MB. Some people in the community loved the new big idea, while others thought the other group was crazy. So both groups decided to go their own ways. Bitcoin Cash adapted a brand-new symbol (BCH), too. People who already had BTC got the same amount of BCH added to their crypto wallets.
As of August 2018, BCH is valued at around $750, while BTC is worth ten times more, around $7,500. Only time will tell whether BCH ever surpasses the original protocol’s value. But hey, at least the forkers got some value out of it!
Chapter 3
Introducing Cryptocurrency Wallets
IN THIS CHAPTER
A traditional wallet is where you keep your valuable personal items such as cash, credit cards, and identification cards. But now that you’re using the most advanced, futuristic form of money (cryptos, baby!), you’re gonna need a brand-new type of wallet to go with it: a cryptocurrency wallet.
With a cryptocurrency wallet, you not only can store the value of your digital money but also send and receive currencies. Additionally, you can monitor your balance the way you’d do with your bank account. This chapter walks you step by step through understanding