Blockchain Forks Explained: A Complete Guide to Types, Examples & Future Impact

Over 100 forks have occurred on the Bitcoin blockchain alone, creating more than 70 active versions of the network. In 2017, a single blockchain fork created Bitcoin Cash, which reached a market capitalisation of over $30 billion. Understanding blockchain forks is essential for anyone involved in cryptocurrency, development, or blockchain technology.

The term blockchain fork frequently arises in cryptocurrency discussions, yet many people struggle to understand what it truly means. A blockchain fork represents one of the most pivotal events that can significantly impact blockchain networks, affecting everything from a cryptocurrency’s value to the functionality of decentralized applications. Whether you are an investor, developer, or blockchain enthusiast, understanding forks is crucial for navigating the crypto ecosystem.

In this comprehensive guide, we will explore everything you need to know about blockchain forks, including the different types, real-world examples, and how they shape the future of decentralized technology.

What is a Blockchain Fork?

A blockchain fork refers to a change or divergence in the blockchain protocol or code that results in a split or modification of the blockchain network. This process occurs when developers or stakeholders decide to alter the rules governing the blockchain network. The fork can lead to the creation of a new blockchain or a variation of the existing one, with changes affecting how transactions are validated, how blocks are added, or how consensus is reached.

Think of a blockchain fork like a fork in the road. Just as a single path can split into two different directions, a blockchain can divide into two separate chains, each following its own set of rules. The original chain continues on one path while the new chain takes a different direction with modified protocols. Both chains share identical transaction history up until the moment of the split.

In the context of open source software like Bitcoin and Ethereum, forks are very common and widely used. Since cryptocurrencies are decentralized and open source, anyone can contribute to the code. This open nature relies on communities to make the software more secure, reliable, and feature-rich. Forks enable developers to copy existing code, modify it according to their needs, and create new versions of the blockchain network.

For example, the Tor browser is open source software, Linux is one of the most widely used open source operating systems, and similarly, Bitcoin and Ethereum protocols are also open sourced. This transparency allows for continuous innovation and improvement across the entire blockchain ecosystem.

Why are Blockchain Forks Important?

Understanding why blockchain forks matter is essential for grasping how blockchain technology evolves. Forks serve several critical purposes in the cryptocurrency ecosystem:

Eliminating Constant Upgrades: If decentralized application developers need modifications to the current state of a blockchain to facilitate a particular product or service, the entire chain would need to undergo upgrades repeatedly. This would be extremely difficult and time-consuming. Blockchain forks provide a solution to this inconvenience by allowing specific changes without disrupting the entire network.

Maintaining Connectivity: In addition to eliminating the need for constant blockchain upgrades, forks also keep all developers and end users connected with the flow of information and data on the main blockchain. This connectivity ensures that the ecosystem remains cohesive even as different versions evolve.

Enhancing Security: Blockchain forks are sometimes created specifically to add security features. When vulnerabilities are discovered, a fork can implement fixes quickly without waiting for consensus on the original chain.

Enabling Innovation: Forks allow developers to experiment with new features, consensus mechanisms, and governance structures without risking the stability of the original blockchain.

How Do Blockchain Forks Work?

Many people associate blockchain forks with the creation of new tokens from an older blockchain. However, there is a major difference between token creation and forking. Blockchain forks are more like an upgrade procedure where an existing blockchain network is modified, rules and protocols are changed as per requirements, and new ones get added. As a result, a secondary branch of the existing chain develops, and this new chain may or may not have a new token.

The mechanics of a blockchain fork can work in multiple ways:

Miner Disagreement: When different miners see their software getting disarranged, they may choose to continue with a particular blockchain version. If two miners are not on the same page, a blockchain may give rise to two different versions, creating a fork.

Developer Initiative: Developers of the blockchain may decide to create forks while adding new features or improvements to the network. This is a planned approach to evolving the technology.

Code Modification: The fork may be created from the existing blockchain, where the chain is split, or entirely new tokens may be created by modifying the original code. This can be done for various purposes by open source communities.

The new blockchain fork typically shares some common characteristics and history with the parent blockchain, but it usually sets out with a different goal and multiple updates from the original version.

Types of Blockchain Forks

Blockchain forks can be classified into several categories based on how they occur and their impact on the network:

Codebase Fork

In a codebase blockchain fork, you can copy the entire code of a particular software. For example, suppose you copied the whole Bitcoin blockchain code and modified it according to your needs, such as decreasing the block creation time or making other crucial changes. You would then create faster software than Bitcoin and launch it as a completely new software. This creates a new blockchain from an empty blank ledger. Many altcoins running on blockchain today were made this way, making small changes to Bitcoin’s code and creating their own cryptocurrency.

Live Blockchain Fork

A live blockchain fork means a running blockchain is divided into two parts or paths. At a specific point, the software remains the same, but from that point forward, the chain divides into two parts. Live blockchain forks can occur for two main reasons: accidentally through mining conflicts, or intentionally through planned protocol changes.

Accidental Fork (Temporary Fork)

When multiple miners mine a new block at nearly the same time, the entire network may not agree on which new block to accept. Some nodes accept the block mined by one party, leading to a different chain of blocks, while others agree on alternative blocks. This situation arises because it takes finite time for information to propagate across the entire blockchain network, and conflicting opinions can exist regarding the chronological order of events.

In accidental forks, two or more blocks have the same block height. These temporary forks resolve themselves eventually when one chain dies out (gets orphaned) because the majority of full nodes choose the other chain to add new blocks to and sync with.

Intentional Fork

In an intentional fork, the rules of the blockchain are changed deliberately by modifying the code. This gives rise to two types of forks based on backwards compatibility: soft forks and hard forks.

Soft Fork vs Hard Fork: Understanding the Key Differences

The distinction between soft forks and hard forks is fundamental to understanding blockchain evolution. Each type serves different purposes and has distinct implications for the network.

What is a Soft Fork?

A soft fork is a backward-compatible change to the blockchain protocol. To understand soft forks, we must first understand backward compatibility. Whenever new rules are added to a system that do not interfere with old rules, and the old rules also consider the new version compatible, this is called backward compatibility.

Soft forks work on this same concept. The old version of the blockchain holds newly mined blocks as valid even after the fork. The new rules can coexist with the old version of the blockchain, while the updated blockchain is responsible for validating transactions. This method has been used to add new features to existing blockchains like Bitcoin and Ethereum without causing major disruptions.

In a soft fork, you tend to add new rules such that they do not clash with old rules. Rules in a soft fork are tightened rather than loosened. When there is a change in the software that runs on full nodes, the change is such that new blocks mined based on new rules are also considered valid by the old version of the software.

What is a Hard Fork?

A hard fork is a radical change to the blockchain protocol that is not backward compatible. This means that nodes running the old protocol will not be able to interact with nodes running the new protocol. Hard forks often result in a permanent split from the original blockchain, creating a new chain with its own set of rules and functionalities.

In a hard fork, the rules are loosened rather than tightened. New blocks mined based on new rules are not considered valid by the old version of the software. When hard forks occur, new currencies come into existence alongside the original currency, as seen with Ethereum (original) and Ethereum Classic (new), or Bitcoin (original) and Bitcoin Cash (new).

Equivalent quantities of currency are typically distributed to full nodes that choose to upgrade their software so that no material loss occurs. Such hard forks are often contentious, generating conflicts in the community. The final decision to join a particular chain rests with each full node operator.

Famous Blockchain Fork Examples

Throughout blockchain history, several notable forks have shaped the cryptocurrency landscape. Here are the most significant examples:

Bitcoin Cash (BCH) from Bitcoin (BTC)

One of the most famous hard forks occurred in August 2017 when Bitcoin Cash split from Bitcoin. The network split was mainly due to a disagreement about how to increase transactions per second to accommodate growing demand. A faction of the Bitcoin community wanted to increase the block size limit from 1 MB to 8 MB. This led to the community splitting into two groups, resulting in Bitcoin Cash with larger block sizes and the original Bitcoin maintaining its smaller blocks.

Ethereum Classic (ETC) from Ethereum (ETH)

The DAO hack of 2016 led to one of the most significant hard forks in blockchain history. After approximately $50 million worth of Ether was stolen, the Ethereum community faced a difficult decision. Most of the community agreed to hard fork to reverse the hack and return funds to investors. However, a portion of the community believed that “code is law” and the blockchain should remain immutable. This philosophical disagreement resulted in two chains: Ethereum (which reversed the hack) and Ethereum Classic (which maintained the original transaction history).

Segregated Witness (SegWit) on Bitcoin

SegWit is a prime example of a soft fork. Implemented in 2017, it added a new class of addresses (Bech32) to Bitcoin without invalidating existing P2SH addresses. A full node with a P2SH type address could still conduct valid transactions with a node using a Bech32 type address. This upgrade improved Bitcoin’s scalability without requiring all nodes to upgrade immediately.

Taproot Upgrade on Bitcoin

The Taproot upgrade, activated in November 2021, was another significant soft fork that enhanced Bitcoin’s privacy and user experience while developing the capability to execute smart contracts more efficiently.

Litecoin from Bitcoin

Litecoin represents a codebase fork of Bitcoin. Created in 2011, Litecoin copied Bitcoin’s code but modified it to decrease block generation time to 2.5 minutes (compared to Bitcoin’s 10 minutes) and implemented a different hashing algorithm. This created an entirely new cryptocurrency from scratch with its own blockchain starting from block zero.

Why Do Blockchain Forks Occur?

Blockchain forks occur for various reasons, often driven by the need to address issues or implement improvements. Understanding these reasons helps appreciate the role forks play in blockchain evolution:

1. Adding New Functionality

The blockchain code is upgraded regularly. Since most public blockchains are open source and developed by people from around the world, improvements and new features are constantly being proposed. When significant new functionality cannot be added through minor updates, a fork becomes necessary.

2. Fixing Security Issues

Blockchain and cryptocurrency technology is relatively new compared to traditional financial systems. Research is still underway to fully understand and secure these systems. When security vulnerabilities are discovered, forks can implement fixes to protect the network and its users.

3. Reversing Malicious Transactions

The community can actually void all transactions of a specific period if they are found to be the result of breaches or malicious activity. While controversial, this capability has been used in extreme circumstances like the DAO hack to protect users from significant losses.

4. Resolving Community Disagreements

When there is significant disagreement within the blockchain community about the direction of the project, a fork can accommodate differing visions. This allows both groups to pursue their preferred approaches on separate chains.

5. Improving Scalability

As blockchain networks grow, scalability becomes a critical concern. Forks can implement changes to increase transaction throughput, reduce fees, or improve overall network performance.

Process of Implementing a Blockchain Fork

The implementation of a blockchain fork follows a structured process that ensures community involvement and technical stability:

How Do Blockchain Forks Affect Cryptocurrency Values?

A blockchain hard fork can affect cryptocurrency values in various ways, creating both opportunities and risks for investors:

Market Uncertainty: When a hard fork happens, it creates a new version of the blockchain, which might lead to the creation of a new cryptocurrency. This can cause confusion and uncertainty in the market, making the original cryptocurrency’s value fluctuate significantly.

Positive Sentiment: If the new version is seen as an improvement that addresses genuine issues, the original cryptocurrency’s value might rise because people expect better features or performance. Successful forks can increase overall confidence in the ecosystem.

Negative Impact: However, if the new version seems more promising than the original, or if the fork creates community division, the value of the original cryptocurrency might drop as users and investors migrate to the new chain.

Increased Volatility: During and after a hard fork, the market typically experiences more volatility as traders react to the changes and attempt to capitalize on the situation. This can present both opportunities and risks.

Free Tokens: In many cases, holders of the original cryptocurrency receive equivalent amounts of the new cryptocurrency on both the old and new chains after the fork occurs. This “airdrop” effect can temporarily increase overall value for holders.

Future of Blockchain Forks

The future of blockchain forks is an area of great interest to blockchain enthusiasts and experts. While it is difficult to predict with certainty what will happen, several trends and developments provide insight into what we can expect:

More Soft Forks: We may see more soft forks in the future, as they are generally less disruptive to the network and require less consensus to implement. Soft forks can add new features or improve efficiency without creating new cryptocurrencies.

Continued Contentious Forks: We may also see more contentious hard forks as different groups within communities have varying opinions on blockchain direction. This could lead to more community splits, with some users continuing to use the old version while others switch to new versions.

Interoperability Solutions: In recent years, there has been a trend towards developing interoperability protocols and multi chain architectures. These solutions aim to make it easier for different blockchain networks to communicate and share data without requiring hard forks, potentially reducing the need for forks altogether.

Mature Ecosystems: As the blockchain ecosystem continues to mature, there may be less need for major updates requiring forks. The focus may shift towards incremental improvements and optimizations that can be implemented through soft forks or other means.

Governance Evolution: New governance mechanisms may emerge that allow for smoother protocol upgrades without contentious splits. On chain governance and voting systems could help communities reach consensus more efficiently.

Common Misconceptions About Blockchain Forks

Several misconceptions exist about blockchain forks that deserve clarification:

Misconception 1: Forks Always Cause Conflict
A common misconception is that forks always result in conflict or damage to the original blockchain. In reality, forks are often implemented to enhance the technology by adding new features, fixing bugs, or improving performance. Many forks, especially soft forks, are executed smoothly and lead to beneficial changes.

Misconception 2: Forks Indicate Project Failure
Some people believe that forks indicate failure or irreconcilable disagreements within a blockchain project. However, forks are a natural part of blockchain growth and adaptation, often driven by the need for innovation and improvement rather than signs of dysfunction.

Misconception 3: All Forks Create New Cryptocurrencies
While hard forks can create new cryptocurrencies, soft forks do not. Soft forks are backward-compatible upgrades that enhance the existing blockchain without splitting it into separate chains.

Misconception 4: Forks Are Always Disruptive
While initial confusion can occur, many forks, including soft forks, are executed smoothly without significant disruption to users or the network.

Conclusion

The world of technology keeps evolving, and blockchains are keeping pace with this evolution. However, this continuous development implies a need for ongoing upgrades to blockchain systems. Blockchain forks keep these networks transforming into newer, more secure, and advanced versions of themselves while also giving birth to new cryptocurrencies.

Understanding blockchain forks is essential for anyone involved in the cryptocurrency space, whether you are an investor, developer, or enthusiast. Forks represent critical moments in blockchain history that can create new opportunities, resolve conflicts, and drive innovation forward.

From soft forks that seamlessly upgrade networks to hard forks that create entirely new cryptocurrencies, these mechanisms ensure that blockchain technology can adapt to changing needs and continue to evolve. As the ecosystem matures, we can expect forks to remain an integral part of how decentralized networks grow and improve.