Bitcoin Hard Forks in Layman's Terms

A benefit of an open source software is the ability to take the code base of an app and develop it in a new direction. This, as you probably know, is called forking, and it is very popular now. For example, many Linux distributions can be traced back to Debian, Fedora or Slackware. Forks (or splits) happen periodically in all open-source communities. Sometimes there are genuine differences of opinion, and network effects are not enough to keep everybody together, so a group secedes.

Bitcoin is no exception. It has already underwent a couple of forking, but the upcoming one is arguably the most disruptive. Three versions of bitcoin blockchains could exist after the so-called hard fork, which has the potential to create two blockchains, each with its own set of coins. It is a turning point of a three-year-long battle between two fractions who’ve been arguing over a question how to increase the amount of transactions the blockchain can process per second. The new coin is unlikely to create controversy over the “real” bitcoin, but this disagreement is already under way. Major industry players say that consensus between opposing camps looks increasingly unlikely. That opinion was echoed by some of the biggest mining pool operators and programmers, who were played major parts in developing the infrastructure of the original bitcoin network.

Users could potentially benefit from such a scheme, as more coins are created. Each bitcoin will effectively be copied into the new blockchain. Mind: doubling of coins does not mean doubling of value, because after a hard fork, the value of both versions of coins are determined based on demand/supply in the market. But what makes blockchain developers disagree and eventually start their own new Bitcoin versions?

In general, it seems that by the end of November we will have three Bitcoin blockchains. One blockchain will follow the current Bitcoin protocol (BTC coin). The second blockchain will follow the Bitcoin Gold protocol (BTG), and the third blockchain will follow the SegWit2x protocol (B2X).

Bitcoin Gold was created by Jack Liao and launched as a hard fork of Bitcoin. The goal of BTG is to become a better cryptocurrency than Bitcoin. The chief way the developers plan to do this is to make it possible for anyone with GPU graphics cards to mine Bitcoin Gold using their home computer, which they believe makes mining more democratic. This ruffles a few feathers on the big companies that mine Bitcoin using computers called ASICs that costs thousands of dollars each, and because of the prohibitive costs of mining Bitcoin, this secures the power to a limited group of companies. The problem with Bitcoin Gold is that it is still in active development, and its current state does not provide the necessary resources to provide a seamless experience for all users.

A disagreement between key stakeholders over how to update the core software that runs bitcoin is driving the upcoming Bitcoin SegWit2x fork. The crux of the fight, in a nutshell, is to double, or not to double. (Talking about bitcoin blocks.) The blocks, which are added every ten minutes, serve as a record of all bitcoin transactions to create a permanent blockchain ledger. The current controversy means that there is likely to be two Bitcoin blockchains: one that uses smaller 1 MB blocks and one that uses bigger 2 MB blocks. The fork is supposed to go into effect for block number 494,784 (probably on November 16).

You should understand that there is no such thing as a bad fork. Experimentation and competition are good for any developing industry. It is for the market to decide on the value of each initiative. Open-source ecosystems are designed to evolve, whether that’s through in-project improvements or forks. “Evolution is a messy process, so it doesn’t always turn out well, but sometimes that’s the only way to have big breakthroughs”, says Rob Viglione.

At the moment, there is no reason to panic over possible rally. By looking at bitcoin’s price, one would hardly conclude that the original blockchain currency is facing turmoil. Bitcoin surged by 24% last week and reached new record high. However, one of the motivations for buying bitcoin is the hard fork itself. Remember? If you own bitcoin on fork day, you will also receive equal number of the new digital currency.

From the other point of view, saturating the market with different versions of bitcoin may be confusing to users. And it discredits the claim that there is a limited number of bitcoins, since one can always fork it and double the supply. Splits sprout from a minor debate on how to handle the block size limit. Instead of coming to agreement, the community, developers and code are fracturing into different groups. This does not speak well for bitcoin’s future, where it will face new and bigger challenges requiring further upgrades to the code base. If instead of upgrading there will be more and more forks, bitcoin is likely to lose its market value and general popularity.

However, for now there’s no threat that bitcoin prices will plunge after the hard fork. Regardless of which blockchain emerges as a candidate to provide “real” BTC, bitcoin is still enjoying plenty of thanks to growing institutional support from major exchanges. Both CME Group and CBOE have announced plans for bitcoin futures relatively shortly – that’s a sign that institutional capital will flow like never before.

As fork day is coming, keep your wits (and coins) about you and stay out of trouble!


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