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20.07.2022
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Cryptocurrencies keep growing both in number and acceptance globally. New countries continue to join the fray…
Hard Fork in Cryptocurrency
Without being trivial or somewhat offensive, cryptocurrency is a whole dynamic field and no lazy person can survive it. You will on a daily basis meet new terminologies that although meaning something so simple, has a very complicated impression. Hard Fork is such a terminology.
WARNING: Investing in crypto, or other markets, can be of a high risk for your savings. Do not invest money you cannot afford to lose, because there is a risk for losing all of your money when investing in crypto, stocks, CFDs or other investments options. For example 77% of retail CFD accounts lose money.
In cryptocurrency, a hard fork is a radical change in a blockchain network’s protocols. It is linked to blockchain technology and makes a block that was previously invalid transactions and blocks valid and vice versa. However, as a hard fork user, you should have the upgraded latest protocol software version. The parties that may initiate forks include crypto community members of the developers.
Understanding Hard Fork in Cryptocurrency
Before you understand a hard fork, you first have to understand blockchain technology. Blockchain entails blocks of data working as a digital ledger. The data that is on the blockchain may be traced from the network’s first transaction. Therefore, a hard fork is a permanent divergence that comes from the latest version of a blockchain. Also, it results in blockchain separation since some of the nodes might not meet consensus.
Furthermore, a fork is produced in the blockchain in which a path continues to follow the current set of rules. As for the second path, it follows a new set of rules. In some cases, hard forks are considered dangerous due to the chain split that takes place often. In case a split takes place between the nodes assisting in transactions validation and miners securing the network then the network becomes vulnerable to attacks and less secure.
A hard fork can be defined as a rule change coming with varied implications in the blockchain network protocol. When making a comparison to the old rules, the valid blocks created using new rules can be considered invalid. On the other hand, the invalid ones will be considered valid. Therefore, for all the nodes to work according to the new rules, a software upgrade is needed.
After the addition of a new rule, one path follows a new blockchain. As this takes place, another one continues with the old one. This means that in case one user utilizes the old software as another uses new software then permanent splits take place.
Reasons for Implementing Hard Fork in Cryptocurrency
The following are the reasons why developers do implement a hard fork:
- Reversing transaction
- Adding new functionality
- Correcting essential security risks in a software’s older version
Claiming a new Coin After a Fork
After a hard fork in Bitcoin, you will get a newly generated coin as well as a Bitcoin. However, there are different ways of claiming the coin to your account. I will discuss some of the tips. One is being careful with services offered by third parties. The reason is that they may be scams. Therefore, be patient and wait till the wallet provider supports the new coin or gets it from a reliable exchange like Binance, eToro, and Plus500.
After a fork, you need to store your bitcoin in a hardware wallet. The reason is that it is more convenient. Remember when a new coin gets enough support from the community, it is the hardware wallet producers including Ledger and TREZOR are the first to create a splitting tool.
Moreover, you should be careful during the first days after a fork. In case you make a transaction during the first days after the fork you may be a victim of a replay attack. Thus, you have to be careful so that hackers do not utilize the transaction data in removing your coins from the wallet. You should be careful and wait till an adjustment in the algorithm is made for a new coin.
The influence of a Hard Fork in Cryptocurrency
Hard forks might have both a positive and negative influence on a crypto network. It all depends on the way it is carried out. The first impact is airdrops. Hard forks performed through crypto divergent version makes the users get crypto airdrops of the same holding in new crypto.
The second impact is an improved network. The protocols of a cryptocurrency that are hard forked in adding features experience improvements in their networks. Moreover, some protocols may experience increased speed and the addition of new functions.
A hard fork may also result in network disruption. In such a situation, a bad actor might use the situation in defrauding other individuals. Also, crypto networks do face security threats including 51% attacks and replay in case the fork is not properly handled.
The Financial Influence of Hard Fork in Cryptocurrency
One of the main effects of a hard fork is the influence it has on the financial value. The outcome of a hard fork determines the fall and rise of a crypto’s price. Moreover, in the past, hard forks have been used by several crypto traders in inflating the price and making quick money.
The large crypto traders do go on purchasing sprees before a hard fork takes place. Their relentless purchasing enables them to access a high number of coins. Later, the old coins are exchanged for new ones because of the fork. This is because the large crypto traders know that the price of new coins will inflate.
Forking increases a crypto’s price. The reason is a newly created crypto is usually more advanced in terms of technology. Also, there are high chances that the price will increase in a case where the traders trust a project to perform. Therefore, it can lead to a price crash in case a market is skeptical concerning a fork.
Differences Between Hard Fork and Soft Fork
In some ways, the hard forks and soft forks are the same. For instance, they perform the same function that when the code in crypto is changed, the old version remains while a new version is developed. However, the difference comes in when on the blockchain that remains valid.
In the soft fork, it is just one blockchain that remains valid while the users are adopting an update. On the other hand, for a hard fork, both the new and old blockchains exist on each side. It means that for you to work with the new rules, you must have a software update.
In understanding it better, we can use operating system grade as an example. After an upgrade, all the applications in a device still work with the new version of the operating system. In this case, a hard fork is a complete change in a new operating system.
