What Are Crypto Forks and How Cash In on Them?
Almost everyone interested in cryptocurrencies used to bump into a word “fork” while reading through some related articles and could hardly understand its meaning. Amid recent events the term and its derivatives have become a shadow to crypto enthusiasts. That is why a crypto trader has to have an eye for what forks are about.
Fork is any change in technological specifics of the original Blockchain net protocol.
One cannot but admit that digital currencies is a brand new thing and they’ve got a long path of comprehensive improvement ahead before they reach their ultimate version. Let’s take US dollar as an example. The note as we all remember it is the result of a number of evolutionary stages it has gone through. Before it came to its current status it has regularly been adjusted as far as paper, color, font, authenticity mark, etc. are concerned. This all has resulted into this money having high counterfeit protection today. So for Bitcoin to get just as reliable asset it’ll take some time either.
Basically forks’ purpose is about improving technological matters of the whole Blockchain so they are a necessary step towards further cryptocurrency development. These add-ons allow for fixing a number of vital issues like security problems caused by some drawbacks in the source code.
Forks are split into two main categories: soft- and hardforks. Let us consider the both in more detail.
This is the so called “soft” protocol change with backward compatibility. When doing so users (i.e. nodes) do not need to update their software. Yet if nodes continue mining blocks of the previous size they won’t be able to cooperate with the updated users. In this case a new string may turn to have insufficient hashrate and it will be shorter than the previous version. As a result, a new block net will be denied.
Among successful softforks there are Bitcoin add-ons BIP66 (added direct DER-signatures) and P2SH (Pay to Script Hash).
Hardfork is a full-fledged split of a new Blockchain net from its original version with both being completely incompatible.
Putting it in other words, this add-on being implemented the nodes of the previous version will not be compatible anymore with the nodes of the new one. That is why nodes need to update their software to continue using coins properly after such forks.
Generally hardforks are planned for large-scale software net update. It may well be however that one of the nets can cease to exist. Everything depends on their hashrate in this case. A striking example for a-nearly-implemented process is the Ethereum hardfork in summer 2016. Following a massive attack at The DAO wallet contracts, which was based at the Ethereum crypto platform, Vitalik Buterin, the founder to the platform, together with his team opted for a net split. As a result a new modernized protocol version with the old name appeared while the previous unaltered one is planned to be deleted. Many crypto enthusiasts however began regarding the original net as “true Ethereum”. Thus the new currency gained community support and was called later Ethereum Classic.
Usually with a hardfork executed users may get new coins at some ratio provided they possess at least one currency unit (e.g. 1 BTC) in the net where that fork is expected and a crypto exchange account for new coin backing. It is to be noted that exchanges also may reward you with coins anytime. Or not. It all depends of the exchange itself. So referring to the tech support would be the option.
In addition, you’ve got a chance to get hardfork coins via crypto wallet either. Just make sure that you, not servers store all private keys for it. In this case we recommend you being cautious and choosing verified wallets only to avoid funds theft.
A shining example for the situation is the Bitcoin Gold case occurred late November last year when developers advised the would-be users their official wallet designed by some side project. Unwitting traders added their private keys to this client to find out soon their accounts thieved for over $2.5 mln and never recovered since.
So, if choosing between the two variants our recommendation would be the first one. Of course, rate of implementation is a flaw here, but it is far safer.
What is more, if you have got no coins at the moment of split, you won’t be able to get a new currency. We also advise you to refrain from transactions involving fork-related currencies during the period of hardfork.
One has to keep it in mind that any fork bears potential risks (especially as far as Bitcoin Diamond-like currencies and dozens of other Bitcoin forks are concerned). So if you feel uncertain about the currency, use all the information on it. Monitor the corresponding community and the latest news about the coin and take experts’ opinions into account.