A fork happens when the community of a crypto project comes together and decides to make a change to a blockchain's protocol, or a basic set of rules. Let's look at the different types, benefits and risks.
Soft Forks vs Hard Forks
Cryptocurrencies can have minor upgrades, like a bug fix. Other times, it can be a complete system overhaul.
A soft fork brings new features or functions, usually at the programming level. Soft fork changes are minor and shouldn't break compatibility with the old protocol.
If nodes aren't updated to the newest version, they still should be able to work with it. Think of a soft fork as a software upgrade, like updating your computer or phone to the latest OS.
Bitcoin's soft fork implemented the SegWit upgrade—this increased block capacity and security.
A hard fork occurs when the code changes so much the new version isn't compatible with the earlier blockchain. This creates two separate blockchains: the original and a new version that follows a different set of rules.
Crypto like Bitcoin Cash and Bitcoin Gold came from the original Bitcoin blockchain because of a hard fork.
The Pros and Cons
If there's a disagreement about the direction of a blockchain, a fork allows developers to explore new ideas and solutions that could benefit investors.
Since forks create new coins, this increases competition. It could generate new investment and liquidity in the crypto market.
Technical improvements and upgrades help boost a blockchain's functionality.
With an upgraded blockchain, there's a better chance of adoption of the technology and the value of its coin.
The average investor might get confused when a fork happens. Not every crypto investor will know or understand what's going on.
Hard forks burden a network by splitting resources. This makes it more difficult for miners because it requires more storage and bandwidth.
Miners help secure the network and nodes validate transactions. If these are split and in disagreement, the network's security is weaker and more prone to attacks.
Wrapping Up
Crypto forks tend to make or break a coin. It's important to stay up-to-date with any news or changes.
Stay connected with the developers and community for any project, even if it's a long-term hold.
Make sure to define your trading strategy. Set a goal, risk level, and time frame. Set stop losses to protect yourself if need to get out.
And stay vigilant when protecting your crypto! Use FLOW to support focus and concentration throughout your day.
