What is a Fork in Crypto?

Ever seen cryptocurrencies with familiar-sounding names? For example, Bitcoin (BTC) and Bitcoin Cash (BCH), or Ethereum (ETH) and Ethereum Classic (ETC).

Bitcoin and Ethereum, you may be familiar with – but what about Bitcoin Cash and Ethereum Classic? What are these?

Why do they share such similar names with the two largest cryptocurrencies? BCH, ETC are spin-offs of their original blockchain, and in crypto terms, these are known as “forks.

” You’re probably already wondering: what is a fork in crypto, and how do crypto forks work? In this guide, we’ll break down what a fork is in cryptocurrency, why it happens, the different types of forks, and the risks and opportunities it brings for investors.

Understanding the Basics of Blockchain Forks The Definition of a Fork in Blockchain A fork in blockchain refers to a change in a cryptocurrency’s underlying code or network. In simple terms, it’s an update to a blockchain’s rules and protocols.

The nature of the update might result in minor adjustments to the existing chain or cause a split that creates a new blockchain, a new set of rules, and a new cryptocurrency. How Blockchains Operate Before a Fork Blockchain networks operate on consensus, meaning everyone must agree on the same rules.

Since most blockchains are open source, developers can propose changes such as performance upgrades, feature updates, and security improvements. But these changes only happen when the community reaches an agreement.

Before a fork occurs, the blockchain operates as a unified system with every participant following the “consensus. ” Think of it as a game of cards: if everyone follows the same rulebook, the game runs smoothly.

Similarly, a blockchain remains cohesive and synchronized as long as all nodes adhere to the same protocols. Why Forks Are Necessary in Crypto Forks are significant for allowing blockchains to make major changes or enhancements, like creating new features, fixing security vulnerabilities, or speeding up transactions.

Without forks, it could be possible for networks to be stuck with old rules and unable to evolve. Forks can also be great for settling disputes in decentralized communities.

If the developers, miners, or users can’t come to an agreement on certain changes, such as block size or governance rules, forking allows the network to split, letting differing groups follow their chosen path. Types of Forks in Cryptocurrency There are several blockchain fork types, including hard forks, soft forks, and temporary forks caused by mining conditions.

Hard Fork – Permanent Chain Split A Hard Fork occurs when a blockchain undergoes a major upgrade that consists of changes that are completely incompatible with previous consensus rules, transaction structures, or network features. For a hard fork to be legitimized, there needs to be a majority consensus among network stakeholders, and afterward, network participants using the previous version (not willing to upgrade) will no longer have access to the new version.

Because a hard fork creates two separate paths, it can lead to the development of new networks, coins, and ecosystems, each with its own rules and governance. Typically, those who prefer the original protocol continue on the old chain.

Soft Fork – Backward-Compatible Upgrade A soft fork is a change to a blockchain’s protocol that is backward-compatible. This means participants who do not adopt the new rules (old nodes) are still able to interact with the new blockchain.

Soft forks typically introduce smaller, incremental updates, such as improving transaction efficiency, tightening rules for block validation, or adding new features without creating a separate chain. However, for a soft fork to succeed and avoid splitting the network, a majority of participants (miners, validators, or nodes) must adopt the new rules (i.

e, upgrade to the new protocol). If not, the minority running outdated software may become orphaned from the network, forming an unintended chain split.

Temporary Forks Caused by Mining Race Conditions A temporary fork occurs when two miners find a valid block simultaneously. Both blocks get shared with the network, but since the blockchain can only have one main chain, this creates a brief split called a race condition.

A race condition happens when multiple processes access shared data at the same time, and the outcome depends on the order in which they run. Take for example, Block A and Block B.

Some network nodes see Block A first while others see Block B, creating two competing versions of the same block. The conflict resolves automatically when the next block is mined – it will attach to one of the competing blocks, making that chain longer.

Since the blockchain network always follows the longest valid chain rule, the shorter chain gets abandoned, and its block becomes an orphan block. This type of fork is temporary and does not create a new cryptocurrency.

Why Do Forks Happen? While forks often result from disagreements, they play a crucial role in blockchain development.

Here are some of the reasons why forks happen: Protocol Upgrades and Feature Additions Major updates sometimes require forks to improve network functionality. A good example is the Ethereum London Hard Fork, which introduced EIP-1559, an Ethereum Improvement Proposal that dealt with transaction fee issues and improved overall network use.

Bug Fixes and Security Patches There are times when a blockchain finds a significant security vulnerability that requires immediate action. In this case, a fork may help fix bugs and patch vulnerabilities.

The Monero blockchain is a great example of a protocol that hard forks frequently to improve security and privacy, ensuring its blockchain is harder to attack or trace. Community Disagreements and Governance Issues Forks give communities the power to choose their own path.

If participants disagree on updates, they can branch off. Bitcoin SV (BSV) split from Bitcoin Cash over disputes around block size and governance philosophy.

Emergency Responses to Hacks In instances where major breaches take place, forks can be useful for reversing the damage and upgrading security mechanisms. One key example is the Ethereum DAO fork in July 2016, which was executed to reverse a large hack of funds that had been taken and return them to users.

Notable Examples of Crypto Forks Some notable crypto fork examples include Bitcoin Cash, Ethereum Classic, and Litecoin Cash. Let’s get into the details.

Bitcoin Cash (Hard Fork of Bitcoin) In 2017, Bitcoin Cash (BCH) split from Bitcoin (BTC) over debates about scalability solutions and transaction fees. Bitcoin processes only 3-7 transactions per second (TPS) compared to VISA’s 24,000 TPS.

The status quo was unacceptable to BCH proponents, resulting in a proposal to increase the block sizes to achieve 100-250 TPS with lower fees. Bitcoin supporters argued that increasing the block size to upscale TPS could compromise security or decentralization, while also increasing the cost and energy associated with running nodes.

Unable to reach a consensus, the community permanently split: Bitcoin (BTC) maintained small blocks prioritizing security, while Bitcoin Cash (BCH) chose larger blocks prioritizing transaction speed and lower costs. Ethereum Classic (Hard Fork After The DAO Hack) Ethereum experienced a serious crisis in 2016 when an attacker was able to exploit a vulnerability in the smart contract for the Decentralized Autonomous Organization (DAO), stealing about 3.

6 million ETH (worth over $50M at the time). The Ethereum community discussed two options: first, do nothing and let the hack stand (an unchanged blockchain) since blockchains are meant to be immutable, or implement a fork and restore the stolen funds.

Most of the community chose to reverse the hack, creating a hard fork that became the Ethereum (ETH) we know today. A smaller group, however, rejected this decision, arguing that “code is law” and the blockchain should never be altered.

They continued with the original chain, now called Ethereum Classic (ETC). Ethereum London Hard Fork (EIP-1559) August 2021 saw Ethereum activate one of its most significant upgrades, the London Hard Fork.

The most important adjustment included in the upgrade was the implementation of Ethereum Improvement Protocols, or EIPs, which are meant to upgrade the network. A major improvement protocol was the EIP-1559, a proposal designed to fix Ethereum’s transaction fee (gas fee) system, which was at the time controversial.

Before this upgrade, users had to bid for block space. Block space, in this case, refers to the storage that holds transactions.

Because this space is limited, people often compete by paying higher fees to have their transaction picked up by a miner and processed quickly, making costs unpredictable and sometimes very expensive. EIP-1559 replaced this system with a base fee (automatically set by the network) plus a small tip to miners for faster processing.

Additionally, the base fee is burned (permanently removed from circulation) instead of going to miners, introducing a deflationary pressure on ETH. The other improvement protocols introduced as part of the Ethereum London Hard Fork include EIP-3198, EIP-3529, EIP-3541, and EIP-3554.

All these changes were implemented without splitting the network or creating new coins. Litecoin Forks Litecoin (LTC), often called the “silver to Bitcoin’s gold,” has also experienced hard and soft forks over the years, most of which were attempts to experiment with faster transactions, lower fees, or new features.

Key Litecoin soft forks include: Segregated Witness (SegWit, 2017): This upgrade reduced block size. It also improved scalability and enabled technologies like the Lightning Network.

MimbleWimble Extension Blocks (MWEB, May 2022): This upgrade allows users to send confidential Litecoin transactions, where the transaction amount is visible only to the sender and receiver. Key Litecoin hard forks include: Litecoin Cash (LCC): LCC forked from Litecoin in February 2018, created by an anonymous team with no connection to the official Litecoin development team.

The developers claimed they wanted to improve transaction speeds and reduce fees by 90%, while supporting legacy Bitcoin mining hardware by using the SHA-256 algorithm (unlike Litecoin’s Scrypt). The fork attracted a fair amount of controversy because Litecoin’s founder, Charlie Lee, openly condemned the fork as a scam, telling users to be careful and not to fall victim to it, and also criticizing the efforts behind the fork for taking the Litecoin name without permission.

The anonymous team promised holders 10 LCC tokens for every 1 LTC, which was appealing, but the project never took off due to its questionable legitimacy and lack of community support. Feathercoin (FTC): Developed as a fork of Litecoin in April 2013, Peter Bushnell thought he could develop a more user-friendly cryptocurrency that had the potential to address the issues he saw with other coins.

The original concept was to create a more accessible and inclusive mining experience (especially for smaller miners) while also providing much faster block times than Bitcoin. Other forks include Junkcoin (JKC), Dogecoin (DOGE), Luckycoin (LKY), Monacoin (MONA), and Einsteinium (EMC2).

How Forks Affect Investors and Users While forks often aim to improve scalability, security, or functionality, they can also create uncertainty and opportunities for both investors and users. Here’s how a crypto fork affects investors and users: Impact on Coin Supply and Valuation Forks create new cryptocurrencies, effectively increasing the total circulating supply in the market.

This can dilute the value of the original coin unless both chains gain independent traction and community support. When Bitcoin Cash (BCH) forked from Bitcoin in August 2017, both cryptocurrencies maintained significant value.

Bitcoin holders automatically received an equal amount of BCH, creating additional value for investors. For unsuccessful forks, initial hype quickly fades and values crash.

Projects like Bitcoin Diamond, Bitcoin Gold, and numerous other Bitcoin variants struggled to maintain relevance after initial exchange listings. Most of these forks lost over 90% of their value within months, wiping out speculative gains.

Basically, you must keep in mind that not all forks create value; many result in worthless tokens. Wallet and Exchange Support The overall success of any fork is dependent on infrastructure adoption, and specifically, if there is support from major wallets and exchanges for the new chain.

If there is no support from an exchange or wallet, then users have no way to access or store their new coins, and as a consequence, they cannot trade them. After Ethereum’s controversial split, many of the top exchanges at the time, including Coinbase, Binance, and Kraken, supported both chains.

Meaning users could claim their Ethereum Classic (ETC) tokens and immediately trade them. The backing from exchanges ensured both the ETH and ETC chains were able to coexist and thrive.

On the other hand, loads of minor forks get little or no exchange support, leaving holders with worthless tokens. MoneroV exemplifies such failure.

Before it split from Monero, it promised improvements in scalability, a capped supply, and the incorporation of MimbleWimble, but the project failed spectacularly. MimbleWimble was never implemented, and development stalled.

Claiming Forked Coins When a cryptocurrency forks, holders of the original coin typically receive an equal amount of the new token – but only if they claim it correctly. When Bitcoin Cash split from Bitcoin in August 2017, users needed to import their Bitcoin private keys into Bitcoin Cash wallets to access their free coins.

Many people who stored Bitcoin on exchanges had to wait months until those platforms added support for the new coin. Unfortunately, during Bitcoin SV’s split from Bitcoin Cash, technical complications made the process risky and confusing.

While major exchanges eventually supported both coins, many users faced weeks or months of delays before they could access their Bitcoin SV tokens. Those who acted quickly often benefited more than casual investors who waited or didn’t understand the claiming process.

Market Volatility Around Fork Announcements Fork announcements often cause big swings in crypto prices because investors either hope to get “free” coins from the fork or worry about the network’s stability. Traders may pile into the original coin before the fork, expecting to benefit, while others sell off due to uncertainty about which chain will survive.

When Bitcoin Cash split from Bitcoin, investors who held Bitcoin automatically received Bitcoin Cash as well. This “two coins for one” effect created excitement, increased trading activity, and rewarded early holders generously.

On the flip side, the Bitcoin Cash fork, resulting in BSV, fell on the other side of the spectrum. The “hash war,” as it was called, confused investors, led to sharp price drops, and even pulled down the broader crypto market.

Risks and Opportunities from Forks Potential Gains from New Coins Hard forks that create a brand-new cryptocurrency are often exciting for investors because they can result in “free money. ” When a blockchain splits, anyone who holds the original coin at the time of the fork usually receives an equal amount of the new coin.

For example, if you owned two coins on the old chain, you would also automatically get two coins on the new chain. To take advantage of this, investors must ensure their coins are stored in a personal wallet or exchange that officially supports the fork.

If the wallet or exchange doesn’t recognize the new chain, you won’t receive the new tokens. Once the new coins are distributed, you can decide what to do with them: sell quickly to lock in a profit, or hold on and hope the value rises over time.

Increased Security or Functionality Some forks are created to improve the original blockchain, adding new features, boosting scalability, or patching vulnerabilities. For instance, Litecoin’s MimbleWimble Extension Blocks (MWEB) upgrade introduced optional transaction privacy without creating a new coin.

Similar examples include Bitcoin’s SegWit upgrade, Ethereum’s London Hard Fork, and Monero’s regular hard forks for enhanced privacy. When successful, these kinds of forks can make the network more useful and trusted, ultimately benefiting long-term holders.

Risk of Scam Forks and Fake Chains Not all forks are made with good intentions. Some developers launch “scam forks” or copycat chains just to cash in on hype, leaving investors with worthless tokens.

Sometimes, fake websites or wallets trick users into giving away their private keys while trying to “claim” forked coins. A good example is the wave of low-quality Bitcoin forks that popped up after Bitcoin Cash, many of which disappeared quickly or never gained exchange support.

The Future of Forks in Blockchain Development Governance Models to Reduce Disputes Forks often happen because developers, miners, or the community disagree on key decisions about the blockchain, such as governance rules, transaction policies, or the project’s direction. Stronger governance systems in the future could help reduce these disputes.

For example, blockchains like Tezos and Polkadot let token holders vote directly on major decisions, from protocol changes to network policies. This kind of on-chain voting allows the community to resolve conflicts without splitting into competing chains, making the network more stable and reducing the chance of contentious hard forks.

Shift Toward Layer 2 Upgrades Instead of Forks Instead of changing the core blockchain through forks, many projects are now turning to “Layer 2” solutions to improve speed and reduce costs. These are upgrades that run on top of the main chain rather than altering it directly.

For instance, Bitcoin’s Lightning Network and Ethereum’s rollups are Layer 2 technologies that boost scalability without needing a risky fork. After the Ethereum Merge of 2022, the blockchain became a stronger base for Layer 2 networks such as Arbitrum, Optimism, and Polygon.

These networks help lower transaction fees, increase throughput, and support wider adoption of decentralized applications. Interoperability and Cross-Chain Fork Impacts As blockchains become more connected, a fork on one network can affect many others.

For example, an Ethereum fork can impact not just ETH, but also tokens, NFTs, and apps built on its network. Chains linked by bridges or cross-chain protocols can also be disrupted if rules change.

This means developers must carefully plan forks to avoid disrupting multiple ecosystems at once.