Is a Cryptocurrency Fork a Stock Split by Another Name?

Is a Cryptocurrency Fork a Stock Split by Another Name?

 

AIRDROP 2
BLOCKCHAIN AND CRYPTOCURRENCY NOTES

USE THE FORKS

Why Did Bitcoin and Ethereum Fork? Is a Fork a Cryptocurrency Stock Split?

November 29, 2017
Byron Berry, CFA
bb@coreventusinc.com
(647) 302-8276
Abhishek Jain

OVERVIEW

The two top cryptocurrencies by market cap, Bitcoin and Ethereum, have both had major hard forks in the past year and a half, creating “new” cryptocurrencies Ethereum Classic and Bitcoin Cash.  Some view hard forks as equivalent to stock splits – in some cases you do get a whole new coin with value – but the reality is more complicated than that.

What is a Blockchain Fork?

There are Hard Forks and Soft Forks.  Both types involve a change in the software governing the cryptocurrency.  A soft fork is a change in the code such that all blocks created by the changed software will be recognized as well by the old software.  A hard fork is where a new blockchain is created, and two sets of rules govern the two blockchains post-fork.  Holders of the existing coin are automatically granted a coin on the new protocol.  In many cases, a hard fork is accepted by all market participants and only one set of code (and one coin) continues.  However, in some important cases, the fork causes two distinct currencies to continue.

Ethereum Hard Forks

The DAO Hack Hard Fork

On June 18, 2016, the Distributed Autonomous Organization (DAO) was hacked, with about US$70mm missing due to a loophole in the existing Ethereum/DAO code.

The Ethereum (ETH) community split, with the vast majority (reportedly over 80%) choosing to support a redo, where the hack was undone, and the loophole was plugged.  A smaller group of Ethereum fundamentalists argued the “Code is Law’ and was not subject to revision – supports of this vision were numerous enough to allow Ethereum Classic (ETC) to continue as before.

The market supports both, but as an investment horse race, Ethereum has been the winner since the hard fork.

 

The Byzantium Hard Fork

This one occurred October 16, 2017.  Thanks to widespread acceptance by market participants, the new chain has been accepted as the default chain.  Byzantium is the fifth hard fork in Ethereum’s history; the next hard fork, Constantinople, is set for 2018.

Bitcoin Hard Forks

The Bitcoin Cash Hard Fork

On August 1, 2017, the Bitcoin blockchain did a hard fork, creating two separate currencies:  the existing Bitcoin (BTC) and the new Bitcoin Cash (BCH)

 

BCH was developed due to the scaling problem in Bitcoin.  Right now, you can’t buy a cup of coffee with Bitcoin – transactions can take an hour to confirm, and transactions fees are now more than $20.  If you hold to the vision of Bitcoin as a true currency that can be used for all transactions easily – we do – this is a serious problem.

Bitcoin Cash made mining easier, and therefore transaction faster, by changing the block size from 1 MB to 8 MB, and by making other mining difficulty adjustments that reduce it to about 7% of Bitcoin’s difficulty, making it roughly 15x faster.  has the same maximum supply as Bitcoin: 21,000,000 coins. However, with the larger block size, it is harder and more expensive to support full nodes, which form the backbone of the network and keep it secure by ensuring that all the rules of Bitcoin transactions are followed. In practice, this means the network will favour larger miners or mining pools.

Since the fork, Bitcoin Cash has materially outperformed Bitcoin, although BCH’s price, at $1600, remains much lower than BTC, at $10,800.

Bitcoin Cash Hard Fork II

On November 13, 2017, at approximately 21:00 UTC, the Bitcoin Cash blockchain did a hard fork, designed to attract more miners improving the Emergency Difficulty Adjustment rule.  The hard fork was successful, with the community accepting it.

Bitcoin Hard Fork – The Failure of Segwit2x

Additionally, a technology called Segregated Witness (SegWit2x) was positioned to be implemented in late November which would double the block size of Bitcoin from 1MB to 2MB and remove signature data from the block of data that needs to be processed in every transaction, making the amount of data that needs to be verified in each block smaller by about 65%- leading to faster transactions. While the SegWit2x implementation failed, it is an acknowledgement of some of the critiques of the Bitcoin Cash supporters such as scalability.

Bitcoin Gold – The Other Fork

On October 24th, Bitcoin forked yet again, creating Bitcoin Gold (BTG);  the price has ranged from $133 – $523 since then, and has recently traded around $340.  It has been somewhat controversial within the bitcoin community – yet still has a market cap of just under $6bn, making it the fifth largest cryptocurrency by market cap.

BTG was designed to democratize Bitcoin, by giving mining access to the more common and less expensive GPU-based mining rigs, as opposed to the ASIC rigs that Bitcoin uses. The Equihash algorithm is RAM-intensive, not compute intensive.  The amount and the speed of RAM is a limiting factor.  This means ASICs (Application-Specific Integrated Circuits) cannot be designed and optimized to mine more efficiently, compared to Bitcoin, which uses the compute-intensive SHA-256 algorithm, and most sources believe ASICs dominate Bitcoin mining.

 

NOTE:  Market Price Data sourced from www.coinmarketcap.comDISCLAIMER: AIRDROP is presented as an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific cryptocurrencies or related commodities or securities. Coreventus Inc. and/or its employees may own cryptocurrencies, some of which may be mentioned in AIRDROP.
By | 2017-11-29T21:50:56+00:00 November 29th, 2017|Uncategorized|0 Comments

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