I’m sure many of you have heard chatter about a Bitcoin fork. Whilst some may have a good understanding of what this means, there are probably many of you that are a little confused. I will try my best to provide some clarity on the matter.
Essentially, there are two possibilities, a hard fork or a soft fork. Before I explain the difference, let us address the reason for the fork in the first place.
The current Bitcoin environment is unable to cope with the massive influx of users, which has led to issues with slow transaction speeds. During Bitcoin’s infancy, this was not a problem, the infrastructure worked perfectly fine without any major delays. Over the past few years, Bitcoin has made massive strides in terms of “real life” usage with many businesses accepting Bitcoin payments and we are even able to draw cash from an ATM with a Bitcoin Debit card. In order for Bitcoin to survive and continue to grow, the issue of slow transaction speeds must be addressed. The only way for this problem to be resolved is by increasing the size of the current blockchain. Doing so requires modification of the code. This is where the Bitcoin fork comes into play.
A hard fork is a software upgrade that requires everyone in the Bitcoin community (nodes, miners and wallets) to upgrade to ensure compatibility. Should this happen then all is well and the upgrade will happen without any deviations. However should a considerable size of the community decide not to upgrade, then this will lead to a split. Resulting in two separate versions of Bitcoin. Bitcoin Core and Bitcoin Ultimate, this is basically what happened with Ethereum which is why we now have Ethereum (ETH) and Ethereum Classic (ETC).
A soft fork is a software upgrade where only the miners have to upgrade. Wallets, exchanges and nodes don’t have to upgrade. At the moment it seems like a soft fork called Segwit (Segregated Witness) is what many folks are pushing for. Going the soft fork route does not necessarily mean that there won’t be a split. As a soft fork with minority hash rate will lead to a hard fork, and result in a split. Only a soft fork with majority hash rate will not result in a split.
Whilst some people in the Bitcoin community are in favor of a split some of the industry titans like Vinny Lingham are totally against it, I agree with his reasoning that a split would dilute the strong brand that Bitcoin currently enjoys.
What will happen remains a mystery, the likelihood is that Segwit will be implemented on a soft fork and Bitcoin will remain a single coin without a split. This seems to be the most favored option from the Bitcoin community. However, anything is possible and only time will tell.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
Disclosure: The author has positions in Bitcoin and other cryptocurrencies.