Why Blockchains Fork: A Tale of Two Cryptocurrencies

Posted: 8/18/2017

Bitcoin and Ethereum have both seen high-profile forks in the past year, spawning separate coins with different rules. The splits come down to diverging ideologies and the laws of network consensus.

By Rob Marvin  August 8, 2017 11:42AM EST

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On August 1st, a new cryptocurrency called Bitcoin Cash appeared online. For the first time in Bitcoin's eight-year history, the original blockchain network underwent what's called a "hard fork." A small faction of Bitcoin (BTC) miners split off onto their own blockchain network, spawning Bitcoin Cash (BCH).

Why the split? The technical answer lies in the long-standing Bitcoin community debate over block capacity, the nuances of which we'll get into shortly. More broadly, the Bitcoin fork speaks to a fundamental ideological rift over what's more important: preserving the decentralized nature and independent control of the Bitcoin network, or accelerating transaction speeds to make the cryptocurrency more viable for mainstream e-commerce and payments.

Bitcoin's split is the second high-profile cryptocurrency fork in the past year, after a smart contract vulnerability and subsequent hack led to a split on the Ethereum blockchain in 2016. The result: Ether (ETH) and Ethereum Classic (ETC). Bitcoin and Ethereum's forks came about for entirely different reasons, yet the parallels between the splits can explain a lot about the complicated nature of reaching a consensus on major decisions within a blockchain network. When an impasse is reached, a fork may follow.

Collectively, all four Bitcoin and Ethereum coins still sit near or at the top of the constantly fluctuating cryptocurrency market capitalization index. But you shouldn't necessarily take a coin's market cap at face value, according to Peter Van Valkenburgh, Director of Research for Coin Center, a nonprofit organization focused on the policy issues facing cryptocurrencies.

"The headlines are focusing on 'Wow, Bitcoin just gave birth to a $10 billion baby,'" said Valkenburgh. "But the reality is, until there's liquidity on these markets-enough people trading their Bitcoin Cash coins on exchanges and making transactions on the Bitcoin blockchain-the market capitalization is really based on artificial scarcity. That's bad economics."

The concepts and technologies at play can be confusing even for software experts to wrap their heads around. PCMag spoke to Valkenburgh to sort through how a blockchain fork works, how the Bitcoin and Ethereum splits parallel one another, and what the future may hold for the newly minted Bitcoin Cash.

Read the rest of Rob's article on PCMag.com