Understanding Cryptocurrency Forks
February 12, 2025
Commercial or corporate banking has undergone a sea of change in the recent past. All these changes have not been related to technology. Some of the changes have also been related to ideology. The rise of the concept of sustainable corporate banking signifies an ideological shift in the commercial banking industry. Earlier, corporate banking was […]
In the previous article, we have already seen how the valuation of a sporting franchise can be found using the income approach. This approach relies extensively on finding out the cash flow that is likely to accrue to the sporting franchise and then discounting it at a predetermined discount rate in order to find out […]
Cashless society is the latest buzzword in global finance. At the present moment, only 15% to 20% of the world’s money exists in the form of currency notes. This itself is an absurdity. However, many central banks and governments all across the world have pledged to bring the cash percentage down to zero. This means […]
The main criticism of the Barnewall model was that it only classified investors into two types. This created an oversimplification. Practitioners of behavioral finance wanted the classification to be more accurate and inclusive. This is the reason why they started creating another psychographic model. This model is called the Bielard, Biel, and Kaiser model, i.e., […]
In the previous article, we have already learned about the repo market. We learned about how the repo market is one of the most important segments of the money market. We also learned about the large volumes of transactions that take place in the repo market. We already know that about $2 trillion to $4 […]
In the previous article, we learned about the concept of forking in the cryptocurrency universe. We also understood that we can distinguish between soft forks and hard forks. Soft forks do not lead to radical changes in the fundamentals of a cryptocurrency. Hence, the volatility is not said to be that high. This is not the case with hard forks. Hard forks can be black swan events in the cryptocurrency industry. They can be catastrophic and extremely volatile. It is for this reason that even a casual investor needs to know what a hard fork is and how it could impact the value of their investments.
Simply put, hard forks are fundamental changes in the way the blockchain and cryptocurrency algorithm works. It could be something as fundamental as the hashing technique that would need to be changed. Once this chain is implemented, the new cryptocurrency will now be a completely new unit. This means that the changes are not backward compatible as was the case with soft forks. This is the biggest difference between hard forks and soft forks.
If a cryptocurrency decides to undergo a hard fork, then on the day of the switch, the previous rules and structures become completely invalid. This means that all the users, the nodes that they use, and the blocks that they have mined in the past need to be upgraded in order to be compatible with the new version of the software. Hence, if some users hold old versions of the coin and some others hold new versions, they will not be able to interact with each other. They will effectively become members of different blockchains which will not be connected with one another.
This is the reason that whenever hard forks occur, the old coins have to be converted into new coins. They could be converted based on a 1:1 ratio in which case, they will simply have to be mirrored. Alternatively, they may be converted based on a different ratio which would lead to the existing coins being split to form new ones.
Hard forks have also been used as a way to counterattack hackers. There have been cases where hackers have transferred large sums of money to themselves. The most well-known case is known as the DAO attack wherein the hacker stole 50 million in the form of Ethereum. However, the blockchain voted in favor of a hard fork which meant that new coins were given to legitimate coin holders. This made the hacking futile since the blockchain would not recognize and validate old coins and hence the hacker would not be able to derive value from it.
It is important to note that a consensus is required for a hard fork. If a consensus is reached, the old cryptocurrency will cease to exist and migrate to the new one. However, the idea of a hard fork may not always be agreed upon by all stakeholders. In many cases, there are some stakeholders who vote in favor of keeping the old framework. In such cases, the cryptocurrency splits to form two new currencies. Each group of stakeholders then gets the chance to move ahead based on their own ideas. This type of hard fork where all the stakeholders do not agree and there isn’t 100% consensus is called a “contentious hard fork”. The result of this type of hard fork is that two separate cryptocurrencies come into existence.
The financial impact of a hard fork is quite severe as compared to a soft fork. It can introduce significant volatility in the system because of the following reasons:
The fact of the matter is that forking can sometimes be quite disruptive for the crypto community. However, the impact of not forking can be even more disruptive. This is because cryptocurrencies are built on technologies and hence are meant to be updated from time to time. If they are not updated, they run the risk of becoming static. This could mean that they might have fewer features and may even be prone to attacks.
Your email address will not be published. Required fields are marked *