Hey guys, Chris here from bitconsult. Below is today's blog post from bitconsult.co Enjoy! If you want to schedule a consultation, contact me! chris@bitconsult.co
WHAT THE FORK? – Explaining Bitcoin Forks - 11 OCTOBER 2017
If you’re new to Bitcoin, you may have heard that a fork is coming and you’re wondering what the heck is going on. Today we’ll walk you through the world of cryptocurrency forks and how they affect you and your Bitcoin.
What is a fork?
Bitcoin is an open source protocol for sending value over the internet. If that sounds like mumbo-jumbo, don’t worry. The main point is this: Bitcoin is software. Like all software, Bitcoin gets updated to add features, tighten security, and increase user-friendliness. Most of us are familiar with software updates, particularly with programs that are owned by a large corporation. Take Microsoft Word for example. If management wanted to add a new feature to Word, they’d push the request to their developers, who would code in the changes. Once tested and approved, an updated version of Word would be made available for users to download. Word is owned by Microsoft, and Microsoft’s management team ultimately initiates and approves the software upgrade.
Bitcoin is decentralized, meaning that it is not owned by any company. Bitcoin is also open-source, meaning its code is available for all review, alter, or copy. Users can recommend updates to the Bitcoin code, but changes will only be made if there is a consensus among users that the update should be implemented. These updates, or “forks” come in two forms:
Soft forks are backwards compatible. Nodes can upgrade to take advantage of the new features, but un-upgraded nodes will still function.
Hard forks require that all nodes upgrade or they will no longer function.
In general, hard forks are much more dangerous. If not deployed correctly, the network can lose nodes and miners that help secure the network. In addition, if the update does not work as intended, hard forks cannot be rolled back…A new hard fork would have to be implemented to change the code.
Bitcoin recently went through a high-profile soft fork with the integration of a feature called Segregated Witness (SegWit) in August of 2017. SegWit allows for some information to be removed from Bitcoin transactions, with the effect of freeing up space on the Blockchain and ultimately leading to lower transaction fees. Many wallets upgraded and now give their users the ability to send payments using SegWit, but the wallets that did not upgrade to implement SegWit also function normally.
How do forks affect you?
The average user does not mine Bitcoin or run a full validator node, so many forks happen without them noticing. Most upgrades to the Bitcoin protocol happen behind the scenes, and are implemented by the user’s exchange or wallet where they hold their Bitcoin. So, why should you care about forks? Because they can make you money!
Bitcoin has been incredibly successful, and many new alternative currencies (alt-coins) have been launched that use Bitcoin’s code, with some tweaks. One way to launch a new currency is to copy bitcoin’s transaction history, but implement new rules that the main Bitcoin network will not be following. You may have heard about Bitcoin Cash, which copied Bitcoin’s code and transaction history, but made three changes:
-SegWit was removed
-Block size was increased
-Mining was tweaked.
The changes employed by Bitcoin Cash did not have consensus, so they were not added to the main Bitcoin network, and hence are not an upgrade. So, why am I calling this a fork? Couldn’t this just be considered the creation of an alt coin? For simplicity, the creation of Bitcoin Cash could be referred to as launching a new alt-coin, but technically it is called a fork because of how it is created. At the time that Bitcoin Cash was created, the Bitcoin network actually split into two, with about 95% of participants recognizing the Bitcoin code, and a rogue 5% recognizing the new rules of Bitcoin cash. This created two parallel blockchains as seen below.
This chain split resulted in all Bitcoin holders also receiving and equal amount of Bitcoin Cash. If your Bitcoin were held on an exchange that supported Bitcoin Cash during this time, your account would be credited with Bitcoin Cash, which could be sold or held. If you held your Bitcoin in a private wallet, you likely had to import your private keys to a client that supported Bitcoin cash in order to sell the new coins.
When is the next fork?
There will be a hard fork on November 1st which will double Bitcoins maximum blocksize to 2MB while preserving SegWit. This coin has come to be known as SegWit2x, but the coin’s symbol and official name are to be determined. It is unclear how much support this 2x fork currently has, but it is likely the fork will proceed with a small minority of support, much like Bitcoin Cash. You can read about the history of Segwit2x and the current level of 2x support here.
How can I prepare for the fork?
If you do not care about receiving Segwit2x coins, you do not have to do anything. Bitcoin will continue to operate as normal and your balance of BTC will not change. However, if you want to sell these coins, you’ll need to ensure that the wallet or exchange that you hold your Bitcoin on will support these alternate coins. With the fork date quickly approaching, many exchanges have issued guidance on how they will be handling the fork. Most American users hold their coins on Coinbase, which recently issued guidance that can be found here.
To ensure you will be in control of all coins created via a hard fork, it is important to own your private keys. If you do this, make sure you read about replay protection and protecting your coins during a fork, or contact us for help!