Crypto 101: What’s a Fork?

I’m going to use Bitcoin in the explanation below, simply because its forks are highly visible and relevant at the time of writing. You should know, any blockchain can fork.

Lately, Bitcoin is forking at an ever-accelerating rate, as you may have encountered. Some people think that this just leads to “free money” and others are concerned about brand dilution or how forks will weaken the resultant blockchain networks. Everyone else: secretly has no idea what a fork even is…

Allow me to shed a little light on the situation, because it’s a simple idea with some divisive consequences.

Bitcoin, like any blockchain, has a network of computers central to its existence. These computers all transmit, record, and process transactions every time any bitcoin is moved between addresses. Importantly, they all communicate about the transactions in an agreed upon manner. The miners – the recorders of the transactions – record things in an agreed upon manner. When they get enough transactions they deem them a bundle (a “block”) and then process them (“chain” them) in an agreed upon manner. “Block” – “Chains” – see that? Blockchains depend upon agreement at every step.

Luckily, machines can readily be programmed to operate according to an agreed upon set of instructions. Unfortunately, the computers are only one part of the puzzle here. The other part is the owners of these computers.

The computers make up the network, but the people make up the community. Ultimately, the community must always decide the details of the network.

If the owners of the computers can all agree to program their machines to operate by the same protocol, then they all operate as one homogeneous network: the Bitcoin network, in this case.

If the owners of these machines cannot agree on the exact details of how the network should operate, then they have a couple of choices. They can 1) try to sway the rest of the community to their desires or 2) import the entire history and balances of another blockchain and then just change how transactions are dealt with going forward. In either case, something about the network is going to change – and this change will be referred to as a fork.

Option one, assuming the community could be swayed, would result in a non-contentious fork. That is to say, the Bitcoin network would simply change its rules as a whole, at an agreed upon time. The way transactions were processed or added to the blockchain would have a change of rules. The blockchain would change – the blockchain would fork. But the network and the community would stay together, intact and in agreement.

Option two means an agreement cannot be reached by the community on how the network should function going forward. Any changes will be contentious – there will be a contentious fork. As above, the rules for dealing with transactions will change, but only some members of the community will reprogram their machines to implement those changes. The divided community will end up with multiple blockchains – that are identical until the new rules go into effect. After the rules go into effect, there will be multiple networks.

A Bitcoin owner with an address on the pre-fork blockchain ends up with two addresses after the contentious fork – identical addresses on both blockchains. Whatever was stored at their address is also duplicated.

That last part is what makes people really excited. They feel as though they are getting double the bitcoins for “free”. The problem, of course, is that the two communities involved in the fork end up at odds over which is the “real” Bitcoin. The owner ends up with, at best, Bitcoin and something-not-Bitcoin in the end.

Regardless, they are no worse off… or so they would like to believe. The truth is – now both networks, post fork, are less robust than the larger network pre-fork. The strength of both the communities and the networks suffer. So does the brand whenever there is disagreement about which blockchain is “really” Bitcoin. Contentious forks are not without their own costs in the long run… but that’s an article for another day.

TL;DR: Bitcoin forks double (in number, not necessarily in value) any digital assets that existed on the pre-fork blockchain, but at the cost of size and strength for the networks and communities affected by the fork.