What are blockchain forks?

CMC Markets

Blockchain forks are essentially a split in the blockchain network. The network is built on an open source software, and the code is freely available. This means that anyone can propose improvements and change the code. The option to experiment on open source software is a fundamental part of cryptocurrencies.

Forks occur when the software of different miners disagree over the best way forward for the currency. It’s up to miners to decide which blockchain to continue using. If there isn’t a unanimous decision, then this can result in the creation of two versions of the blockchain. There can be periods of increased price volatility around such events. 

How do forks work?

Forks work by introducing changes to the software protocol of the blockchain. They are often associated with the creation of new tokens. The main way of creating new cryptocurrencies are to create them from scratch or, to ‘fork’ the existing cryptocurrency blockchain.

Creating new tokens from scratch is the most common method.  This is ommonly done through an initial coin offering (or ICO). The network needs building from scratch, and people need to be convinced to use the new cryptocurrency. 

The alternative method is to fork the existing blockchain. With this method, changes are made to the existing blockchain rather than starting from scratch. In this case, two versions of the blockchain are created as the network splits. An example of this can be seen with the creation of bitcoin cash. Differing opinions around the future of bitcoin led to the creation of a new cryptocurrency (bitcoin cash) from the original cryptocurrency (bitcoin).

Hard forks v soft forks

The creation of bitcoin cash from bitcoin is an example of a hard fork. A hard fork is a radical change to the software which requires all intended users of the new currency to upgrade to the latest version of the software. Nodes running on the previous version of the software will no longer be accepted on the new version. A hard fork is a permanent divergence from the previous version of the blockchain. If there isn’t unanimous consent for the new version, this can result in two blockchains using a variant of the same software. 

Sometimes a community will agreed to change the method of hashing the blockchain. This is sometimes referred to as a soft-fork but simply means that the community has upgraded the software that calculates the ledger. 

Our policy on blockchain forks

The price of our cryptocurrency instruments are based on the underlying market. They are made available to us by the exchanges and market-makers with which we trade.

In the event of a hard fork we will generally follow the blockchain that has the majority consensus of cryptocurrency users. We will use this as the basis for our prices. We reserve the right to determine which cryptocurrency unit has the majority consensus behind it. 

If the fork results in a viable second cryptocurrency, we may open an equivalent trade in the new cryptocurrency on client accounts to reflect this or, instead of creating an equivalent trade, we may make a cash adjustment on client accounts. This would be at our absolute discretion and we will have no obligation to do so. We will notify clients of any actions we will take or have taken.

Clients should pay close attention to their trade(s) during this period and consider any implications the new trade may have on their account, such as increased margin requirements. Where clients do not have sufficient funds in their account to meet margin requirements, clients may be subject to an account close-out. 

When a hard fork occurs, there may be substantial price volatility around the event, and we may suspend trading throughout if we do not have reliable prices from the underlying market.

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