DeFi Explained: Forks
You might have heard of forks. A fork is a piece of cutlery, which... Oops, wrong fork! Forks play an essential role within the crypto world. New blockchains and platforms are born on a daily basis because of them. Once you understand what forks are – And what they do, it will be much easier to wrap your head around most blockchains, cryptocurrencies and tokens.
What is a fork?
When a blockchain is getting too large, it is almost impossible to adapt new stuff to the protocol. Consider Bitcoin – Imagine that Satoshi comes up with the idea to adjust the protocol of the blockchain. This is almost impossible due to the size of the blockchain.
To make this work, he would have to make a separate version of the Bitcoin blockchain, a protocol which is different from the Bitcoin protocol. There will then be a split off from the blockchain. And this exact thing happened; consider Bitcoin Cash. The Bitcoin Cash blockchain is the same as that of the Bitcoin blockchain, but with slightly different protocols.
We call the blockchain that splits off a fork. There are then two versions of the same blockchain, with different rules. The reason why it is called a fork, is that this looks quite a bit like a real fork when you visualize it.
There are two versions of a fork. These are the soft fork and the hard fork. Let us talk a little more about them, so that you will get a better understanding what you could do with forks.
A soft fork
First up, the soft fork. The soft fork is a new version of the blockchain that will eventually return to the original version of the blockchain.
This creates the case that some nodes work in the 'old' version of the blockchain, and other nodes work in the 'new' version. They still make blocks at the same time, but the protocols that are used are different.
The usefulness of a soft fork
Every system needs maintenance at some point. Consider, a website, or your own laptop. It receives updates at a certain time. After these updates, certain rules in settings have been changed – For example, new security features.
There are also blockchains of whose creators would like to update the protocol. However, that is often not possible, because most blockchains are too large for this. The maker can then a use soft fork to update the protocol.
Imagine that a blockchain always gives 1 coin as a reward to the miner. The maker wants to change this to 2 coins. For this he could make a new version of the blockchain, where the protocol states that the reward is 2 coins. Some of the nodes will end up in the new part, while another part will remain in the blockchain with the old rules. Both blockchains continue to produce blocks at the same time. However, at some point someone in the old environment will make a mistake by, for example, giving 1 coin as a reward. This node was not yet aware of the new protocol. The network of the updated nodes will then correct it so that the old node can adapt to the new rules. Ultimately, all nodes are aware of the new protocol, after which the entire blockchain continues as before (but with the new protocol).
With a hard fork, things are slightly different. As previously explained, with a soft fork every node can adapt to the new protocol. Now, here is the difference with the hard fork.
The nodes in a hard fork cannot or will not adapt to the new protocol. When they see other nodes following a different protocol, they will not allow and deny their blocks. That is when a new fork arises.
A hard fork can be planned, as in the case of an update, but can also be caused by a disagreement.
When a hard fork is planned, the nodes with the old protocol will be given the option to update their software with the new protocol. They can choose not to do this, so they continue to work with the old protocol in the blockchain. In most cases, the blockchain with the old protocol will die out over time, as most nodes have been updated to the new protocol.
Another scenario is that a hard fork arises because of disagreement. For example, some people may want to adjust the protocol, and others want to adhere to the old protocol. Due to this disagreement, one party decides to start a fork. Nodes can then decide whether to stay in the blockchain with the old protocol or go to the blockchain with the new protocol. In almost all cases, the new protocol will eventually lead to a separate crypto coin.
Examples of forks
There are many crypto coins that have been created from another crypto coin. Some of them have even grown bigger than the original crypto coin. That is why it is always interesting to keep an eye on blockchains that decides to split up.
You may remember the Ethereum DAO hack. In this hack, $ 55 million worth of Ethereum was stolen. This caused widespread disagreement between Ethereum's nodes. In the end there were two different groups. One group wanted to reverse the hack by modifying all the blocks from the past, while the other group was strongly against this. They felt that something like this goes against all principles of blockchain. In the end, these two groups did not came to an agreement. This caused a split in the Ethereum blockchain. The group that opposed the hack's rollback split off and started a new blockchain, is now known as Ethereum Classic.
The split of Bitcoin and Bitcoin Cash was about an issue that Bitcoin had been facing for a while. It is common knowledge that it can take quite a long time for a transaction to be validated by the Bitcoin network. Because of this, many people feel that Bitcoin is not sustainable. Therefore, a group decided to increase the number of transactions in the Bitcoin blockchain. Several proposals were made, but none were received well. One of these proposals was to increase the block size. This proposal eventually led to a hard fork of Bitcoin, which is now known as Bitcoin Cash.
A fork isn’t necessarily strict to blockchains. Forks can also be started from platforms, such as DeFi platforms. Ever since Uniswap made their code open-source and available for anyone to fork, several platforms have implemented it. One of the better-known platforms that did this is Sushiswap.
Sushiswap is a fork of Uniswap and was created in 2020 by an anonymous team called Chef Nomi. Although Sushiswap started as a direct clone of Uniswap – they are both DEXES and use automated market-making where liquidity providers can add funds to liquidity pools to receive trading fees – both platforms have grown into a different direction.
The focus of Sushiswap is user-friendliness. Sushiswap enables liquidity providers to stake LP tokens for extra rewards in the form of Sushi tokens. Sushiswap also focuses on adding features of which the community has voted for. Uniswap, on the other hand, discreetly developed version 3.
In the case of blockchain forks, most investors decide to wait a while before making a transaction with the new crypto coin. This is because they might otherwise fall victim to a replay attack.
When a hard fork takes place, the two blockchains split from each other. If there are enough investors who decide to immediately buy the new crypto coin, hackers can copy the transaction to the old version of the blockchain. They can then proceed to steal crypto coins from your wallet with the transaction data. Because the blockchain is anonymous, it is not possible to find the perpetrator of the attack. In that case, the anonymity that the blockchain offers works against itself.
A replay attack can only take place in the first days of a new crypto coin. After a few days, the algorithm will solve the problem by means of replay protection. That is also the reason that most people do not buy crypto coins during the first days of the blockchain. The chance that they will fall victim to this attack is too great.
Thanks to soft forks, nodes are able to update their protocol. Hard Forks give the opportunity to split nodes that do not agree with each other, and thus create new protocols. Forks keep the blockchain healthy. Even though new forks are initiated daily, they make sure that only the best blockchains and platforms will survive.