Headline: What the Fork?

Date: 1/25/2022

Body:  I was looking at the information resources for one of the previous blogs, and I found a term that I didn’t fully understand.   The term was “fork”.   Now, I know what a fork is; I use one most days.  But, I didn’t think that this definition belonged in a discussion of cryptocurrency.

What is a Fork?

Technically, a fork is where there is a new set of rules being followed, and the accounting books (now there are 2 of them) will be identical up to the fork, and diverge to follow the now different rules.   Confused?   (I was.)  All metaphors are failing here, but think of a set of identical twins.  In utero, they are exactly the same.   The DNA is the same and their experiences are the same.   Then, they are born, and that is the fork.  Their shared history remains identical, but now, how the world reacts to each twin will be different, and they start to experience that world differently   So, after the “fork” their accounting books are different due to the change in rules.  (Sorry, this is the best example I could think up.)

Why is there a fork?

There is a fork for any number of reasons.  Most commonly, the development team wants to add a new feature, and a fork is necessary to allow them to do it.    There is a current example that happened for a different reason.    In the Ethereum ecosystem, there is a group of investors called the Decentralized Autonomous Organization, and this group is HUGE!!!  There was an equally HUGE hack against them and they lost more than $10 Million.  There was a hard fork put in as soon as possible, and the DAO got back the majority of its Ethereum that had been pillaged.

Are there different kinds of forks?

Yes.   Pitchforks are HUGE, the dinner fork is slightly larger than the salad fork, and the oyster fork…(assistant whispers in my ear.)  Oh, sorry.   The answer is still yes, and in this case, there are soft forks and hard forks.  (Get your mind out of the gutter.)    A soft fork often happens when there is a change in programming, but it is subtle enough to link back up the old programming to form a single blockchain.  A hard fork occurs when this programming change is so substantial that the foregoing transactions are no longer compatible with the new code.  Think of the METRO subway in DC.   A soft fork would be if they had new subway cars that were the same size and shape as the older ones, and only the insides are a little different.    In this example, a hard fork would take place if the programming that schedules those trains (to keep traffic flowing, while maintaining safe distances) then that would require reprogramming of  the entire system.

Most interesting, within cryptocurrency, the existing holders will be given tokens in the new denomination, while miners can continue to verify the chain of their choice.

The Bitcoin Cash Hard Fork

Bitcoin Cash is a hard fork of Bitcoin that occurred on August 1, 2017. It was designed to overcome the problems that Bitcoin was experiencing with delayed transactions and lag.   In essence, the hard fork allowed transactions to be broken up into larger blocks of data that are encouraging more people to transact within the currency.  In the old system, the blocks were organized into graphical units called ASICS and this advantaged some players and disadvantaged others.    The objective, therefore, was to enhance the decentralization that Bitcoin ecosystem was built to embrace.

What is the “London hard fork” that I keep hearing so much about?

No, it has NOTHING to do with a scandal within the Royal Family.  This is within the Ethereum ecosystem.   Basically, until recently they have been relying on a rough draft of a code.    Until now, when the volume has been low, the rough draft worked fine.  But, now, with many people joining up with different metaverses, all of which seem to run on the Ethereum code, the blockchain is suffering bumper-to-bumper traffic, as it is not efficient enough to service the traffic.  In particular, there are 5 new Ethereum Improvement Proposals.   Currently these proposals are invoked as “temporary” but will become permanent when Ethereum 2.0 updates.  Each EIP changes some part of the Ethereum process, with the goal of making the process more efficient.  (For instance, there is a Proposal to change how miners are paid.)  Said Matthijs de Vries, Co-Founder and CTO of Alliance Block.

The new transaction fee model is a big deal for Ethereum: it can further increase adoption as new users will have less trouble figuring out how to execute a transaction that won’t fail,” he said.  It is yet to be seen if the burning mechanism will make ETH deflationary, but it is certainly a step in the right direction and will not hurt the price development of ETH on its own.

It would appear that this is an attempt to make the processes more fair.   After this change takes effect, that block of money awarded to the miner is taken out of the inventory of Ethereum.   Counterbalancing this, now the individual parties to a transaction have the opportunity to “tip” the miner for their work.   The obvious problem with this is that the miner can prioritize the transactions they verify on the basis of who gives the biggest tip.  This is a problem known as “front-running” and seems similar to the front-running problems in the stock market.   (Front running in the context  of the stock market is when a party somehow gets whiff of a large transaction upcoming and gets to the market first, placing an order that will be benefitted by the upcoming large transaction.)

The Verdict

I guess forks are something that grow out of the idea of conventional stock markets.   If there is a spin-off from Company A to now Companies A and B, they have a shared history and will have a differing future.   But, these forks within the crypto markets seem to be very different, and government regulation can’t seem to keep up with the changes.  This makes me relatively leery of making any type of substantial investments in crypto.   But, be of good cheer; there are ways to invest in crypto without directly investing in crypto.   Confused?   Tune in next week and I will take a stab at elucidating exactly what I mean.







Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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