At the time of writing this article, 3 of the Top 10 cryptocurrencies by market capitalisation are flavours of Bitcoin. The original Bitcoin chain remains at Number 1 with a market cap just North of $170 Billion. Bitcoin Cash, the contentious fork from August, briefly flirted with the Number 2 spot earlier in November before climbing down to third. The latest entrant is Bitcoin Gold, a fork backed by little more than two developers and a website, which promised to free Bitcoin from the clutches of centralised miners – it currently sits at Number 6, but appears unlikely to challenge the reigning champs.
The mania currently surrounding the various forks of Bitcoin stems from what happened with the August Bitcoin Cash fork. While most traders had predicted that BCash would live a short life before fading into obscurity, it managed to live on and even threaten Bitcoin’s market cap when it surged to $2800 per coin in November. What’s more, the predicted uncertainty turned into fuel for both currencies’ next leg up, as the post-fork Bitcoin surged to $4800 following the August fork.
The recent price surge, while primarily a result of increasing media coverage and public awareness, also benefited from the planned SegWit2X hard fork in November – which ended up being a nonevent, as the major players withdrew support for it in the weeks leading up to the fork. However, this chain of events cemented the profitability that forks have in the Bitcoin world – there are currently no less than 10 planned forks coming up. With names such as Bitcoin Silver, Bitcoin Diamond, Super Bitcoin and Bitcoin Platinum, these upstarts are more evocative of Pokemon games than substantial protocol upgrades.
The forking frenzy has reached such a pitch that future forks are being derided as explicit cash grabs. Some of these forks are even called Initial Fork Offerings (IFOs), akin to the Initial Public Offering (IPOs) from the equity world or the more recent Initial Coin Offerings (ICOs) from the crypto world. A cursory glance at the technical documentation supporting these newer forks and IFOs is alarming – there is negligible technical expertise that has gone into creating the new fork, with code often being copied blatantly from other projects. While the initial forks such as BCash and SegWit2X had actual protocol adjustments at the core of the fork, the salesman for these newer forks push their ‘ideological’ differences from the Bitcoin mothership.
With a flurry of forks flooding the market frequently, we need to examine the nature of these forks, and question their very necessity. Not all forks are bad, but not even a fraction of those in the pipeline are necessary.
Hard vs. Soft
Forks can be of different kinds. The major differences come in terms of the relative ‘softness’ of the fork:
Soft forks are changes to the protocol that are activated by individual nodes on the blockchain. Once a certain % threshold of nodes is reached, the protocol upgrade is accepted as the de-facto standard across the entire network. Soft forks essentially create a subset of rules that can be followed by anyone interested – with the option of rolling them out across the entire network. Soft forks are quasi-democratic ways of upgrading the network itself. Soft forks typically have a low chance of causing network-wide disruption and are the most frequent method used for planned tech upgrades. Some soft forks can also be activated by users (i.e. people transacting on the blockchain, exchanges, business, etc.) without the approval of miners (i.e. people who create the Bitcoin and secure the network). One such example was the User-Activated Soft Fork which brought
Segregated Witness (SegWit) to the Bitcoin network.
Hard forks, on the other hand, require a complete change to the code before the network can even be accessed. Hard forks are not backward compatible, and present additions to the code which change the basic rules. Hard forks end up creating an entirely separate blockchain. These could be necessary for undoing certain actions on the blockchain, or when a fundamental change to the code becomes necessary. A notable example is the Ethereum hard fork after the DAO hack, which created two coins: Ethereum and Ethereum Classic. Hard forks can be much more contentious, especially if the politics of subgroups become enmeshed in the supposed technological changes being implemented. This is most visible in the Bitcoin / BCash hard fork, where a change to the basic size of blocks on the blockchain left the community split in two.
Forks, in general, can be necessary to upgrade the respective blockchains when required. Developers often use forks as scheduled upgrades, bringing in major changes that can’t be introduced in pieces. But not every fork is necessary.
Many of the planned Bitcoin forks are hard forks. While some, like Bitcoin Gold, talk about changing the way Bitcoins are mined, most forks are barely cosmetic changes. As noted earlier, the codebases which are being used for these forks are often empty or bereft of any tech breakthrough.
So, why are they still happening?
It’s hard not to channel my inner Gordon Gekko: “Greed, for lack of a better word, is good. Greed is right, greed works.”
Once people saw that Bitcoin Cash could rise from nothing to a market cap over $20 Billion, there was absolutely no reason to avoid cashing in on the craze. Bitcoin Gold, which fought accusations of pre-mining tokens (a big no-no in the crypto fork world), currently trades at over $300 a coin.
The newer forks being planned, even when they have absolutely nothing new to add to the system apart from being get-rich-quick schemes.
At least with Bitcoin and BCash, there existed the possibility of getting two coins after the fork – thereby doubling the number of Bitcoins you had, if only in name. However, the eventual zero-sum game between the dissenting factions gives you far less than 2x the money. This is even worse when you consider forks like SegWit2X, which refused to implement a safeguard known as Replay Protection. Without it, spending a SegWit2X
Bitcoin could also make your wallet automatically debit a regular Bitcoin. When people jump into the space without an inkling of the technological ramifications of some of these poorly coded forks, it’s inevitable that some of them get burnt. And if you enter the market while it’s pumping, there’s a good chance you’re going to be caught in its subsequent dump. Following the BCash mania last month did exactly that for a few investors in Korea – with the aftermath being serious enough to station police forces outside one of the biggest Korean crypto exchanges.
To fork, or not to
Forks have always been a part of the blockchain ecosystem, and will continue to play a role in its evolution. With the crash-and-burn of some of these forks, though, one can hope for a less manic, more rational plan for their implementation. For an asset class that is expected to cross $1 Trillion in market capitalisation by 2018, these forks, both good and bad, will only be minor speed bumps as capital flows from dumb, panicky investors to smarter, seasoned investors. Just make sure you know which one you are.