Fork

In the world of decentralized finance (DeFi), the term "fork" is commonly used to describe a situation in which a blockchain network splits into two or more separate chains. Forks can occur for a variety of reasons, ranging from technical upgrades to ideological differences within the community, or even for the purpose of creating a new project. In this article, we will explore the pros and cons of forks and provide tips for navigating these events in the DeFi space.

How do blockchain forks work?

When a fork occurs, the original blockchain network splits into two separate versions, each operating independently of the other. This can result in a new cryptocurrency being created, with holders of the original cryptocurrency receiving an equal amount of the new one.

Forks happen for multiple reasons; for example, because the developers need to add functionality, they want to change the course which is the blockchain taking, they need to make the chain safer, or they want to reverse a transaction that has been made. Some forks are made on purpose, but some are accidental (for example, when two miners find the same block at the same moment).

General types of forks

There are two main types of forks: hard forks and soft forks. A hard fork involves a fundamental change in the network's code which cannot be reversed, meaning that nodes need to upgrade their software in order to be compatible with the new version.  In other words, via a hard fork, a new blockchain with a new set of rules is created, and the old chain still follows the old rules. An example of a hard fork can be seen with the splitting of Bitcoin in 2017, which resulted in the creation of Bitcoin Cash.

A soft fork, on the other hand, involves a less significant change to the code, so the two versions of the network can continue to operate together. Node operators do not need to upgrade their software and can still run on the old version of blockchain, with the difference being that they are not able to validate blocks that follow the new rules. This means that the new upgraded nodes can communicate with the old nodes, which usually results in a slow transition to the new version of blockchain.

Protocol forks

DeFi is known for its decentralization and open-source protocols, which allow developers of new projects to copy elements of other projects, rather than starting from scratch. As this is such a time-saving benefit, it is something that occurs a lot. In DeFi, the process of copying another code in order to use it as one’s own is called forking.

Forking protocols is common practice and the amount of money locked in all forked projects is in excess of 4.7 billion USD. The best-known project to be forked is Uniswap, which is a decentralized exchange (DEX) that at one point reached a record high of more than 15 billion USD in trading volume. The forked project, called SushiSwap, took liquidity away from Uniswap and swiftly reached its own billion-dollar trade value, which was a great success for a new project. Since then, many other projects have been forked as developers try to use the success of others to their own advantage.

But despite the fact that this trend does expand the DeFi space, it also has another, more negative impact. Investors often invest their funds into newly forked projects in the hope of using the market trend to earn a great deal of money, but it is important to note that not every forked project has the guaranteed success of its predecessors, which puts people at risk of losing their money. Nevertheless, the ability to fork new projects has resulted in the creation of many successful projects, including SushiSwap, PancakeSwap, Swerve and many others.

PROs

• Forks can introduce new features or improvements to a blockchain, which can enhance its functionality and attract more users
• They can potentially lead to the creation of new and valuable cryptocurrencies, which can benefit investors who hold the original token
• Forks can help to decentralize power and decision-making within a blockchain community, as users have the ability to vote and participate in the new version
• Forking another project is a cheap and accessible way of creating something new

CONs

• Forks can create confusion and fragmentation in the community, leading to a loss of confidence in the original blockchain
• They can lead to the creation of multiple versions of the same blockchain, which can dilute the value and adoption of the original asset
• Deciding to fork a project can create a security risk, as people may fork projects that had vulnerabilities, and these will be passed onto the new project
• People investing in new forked projects can lose their money as the developers might not be able to provide the same standard as the original project

It is important to carefully evaluate the reasons behind a fork before deciding to participate or invest. Look at the motivation behind the fork, the proposed changes, and the community support behind it. If you decide to participate in a fork, be aware of the risks and potential drawbacks, and be sure to follow best practices for securing your assets. Remember that not all forks will be successful, so it is important to approach them with caution and a healthy dose of skepticism.