Traders use the term “forking” a lot when it comes to cryptocurrency. Sometimes, after this fork is over, a new cryptocurrency emerges. So what is it?
Well, it is simply an upgrade to the blockchain. However, there are two kinds of upgrades. Soft fork and hard fork.
Soft-Fork and Hard Fork at Cryptocurrency
Literally, soft-fork refers to a smooth and natural upgrade. Therefore, it does not feel much change from the user’s point of view. In this case, it is also compatible with previous versions of the digital currency. So there’s no separate process needed. Itfork is similar to upgrading IOs. It improves performance by upgrading only the operating system while still using existing smartphones.
On the other hand, hard-fork is similar to when a Smartphone device needs to be changed. A new version of a smartphone flagship has a different CPU, storage and system installed. This is a hard fork.
It is incompatible with previous versions. For this reason, hard-fork’s consent from developers and miners is essential. If an agreement continues smoothly, the cryptocurrency will not be separated or derived. There will only be a move on the system. On the other hand, if a smooth agreement is unreachable, there might be a coin separation.
An example of hard-fork
Bitcoin and Bitcoin Cash are typical examples of coin separation through hard fork. Developers and miners were at odds over how to increase processing capacity for transactions that they pointed out as shortcomings. Bitcoin, which failed to reach an agreement, was eventually separated into Bitcoin, Bitcoin Cash and Bitcoin Gold.
Further, Bitcoin Cash went on another separation to Bitcoin SV and Bitcoin ABC camps over it scheduled for late last year. This is because of some conflicts among developers. Bitcoin ABC’s camp insisted on upgrading to a new version of the protocol, including the smart contact function. On the other hand, Bitcoin SV’s camp has pushed the upgrade towards increasing block size.
Due to this case, the cryptocurrency market experienced a plunge at that time. Bitcoin, which stayed at around $6,300, fell to $3,200 in a month, while Etherium, which stood at $200, fell to a minimum of $80 a barrel.
Recently, U.S. IRS has set a new guidance that explains on how it work for virtual asset tax. Hong Kong has also launched a guidance in relation to a cryptocurrency exchange.