What are bitcoin forks and how do they work?
With the increased interest in bitcoin, it’s important to understand the technology behind this cryptocurrency and the factors that can influence its price. Discover everything you need to know about bitcoin forks, including the difference between soft and hard forks and what they mean for traders.
Bitcoin forks explained
The term ‘bitcoin fork’ can be used to describe two types of events. The first is a change to its underlying software – a ‘software fork’. The second is a divergence in the cryptocurrency’s blockchain – a ‘blockchain fork’. The reason each of these events is called a ‘fork’ is because they present two or more potential routes for bitcoin to follow, much like a fork in the road.
The key to understanding forks is to know a little about how bitcoin and blockchain technology works. Put simply, bitcoin runs across a network of computers – each running the bitcoin software and maintaining their own copy of the blockchain file.
For bitcoin, the blockchain stores the entire transaction history for the network in chronological order; the most recent transactions are recorded in the newest block at the top of the chain, while the oldest are at the bottom in what is known as the ‘genesis block’.
Crucially, there is no central authority in charge of bitcoin’s software or the blockchain file. Instead, any update must be proposed by a user and approved by a network majority before it can take effect. Users sometimes propose different updates at the same time – or there can be a lack of consensus about a proposed update – so it is this system that can give rise to forks.
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