Crypto forks
What are they and why do they exist
Blockchains are a type of ledger that is shared among different computers in a network. This type of database is very secure and can be utilized to keep track of important information. Since the ledger is shared and updated all over the world, you can be sure of its content. However, sometimes, even with proper governance the community can be split about the best way to move forward.
Since blockchains and applications are almost always open-source (some exceptions) a convenient way forward is to break up the marriage. The blockchain will split into two different blockchains, having a shared past but a different future. This is referred to as a fork. Additionally, as they are open source, their communities are responsible for maintaining and expanding the underlying code.
Plenty of blockchains have been forked in the past. Bitcoin and its infamous block size debates have caused some of the community to split off into Bitcoin Cash, Bitcoin Gold, and ultimately Bitcoin SV as well. Ethereum, with the DAO-hack, has split up into Ethereum and Ethereum Classic with the disagreement about whether code is law or that the chain could be rolled back ‘for just that one time’.
Forks can also be done in the context of upgrading an entire network, not necessarily leading to a split. Independent development teams responsible for improvement of the network can add other features that the community agrees to. A soft fork is an upgrade that is optional and backward-compatible. In this regard, it is not mandatory but often eventually becomes the standard. A hard fork in contrast is not backward-compatible with earlier blocks and will split the blockchain.
In the context of applications, the term is used often as well. In this respect, the blockchain does not get duplicated but the application. Forking of an application often means that the smart-contracts that underlie the application have been battle-tested over time. Examples of code-bases that have been forked often are the Uniswap contracts with a total of 370 forks. This is often done as a starting point for a certain application, or when Uniswap is not available on any given chain, to make Uniswap functionality available on that blockchain.
Investing in forks
Investing in forks can be very tricky. If a blockchain splits, the coin holders before the split get an equal numberof coins of both networks. A decision you can make in that case is to sell either of the forks for more of the coin of your choosing. Trading in Bitcoin Cash for more Bitcoin would have netted any Bitcoin holder between 5 and 25% extra Bitcoin depending on when you sold the fork. In this case, you are picking a winner, which can be costly if you are wrong. Keeping both coins and letting the market figure out the winner can be a more conservative strategy.
In respect to applications, more interesting opportunities arise. Often, the original application ‘wins’. This is in large part because of the community and branding of the application but maybe more importantly because the original developers often understand the smart-contracts they programmed the best. They will have the best risk-management and good updates that do not break something unexpected.
The story changes if, for whatever reason, the app does not want to deploy on a certain blockchain. Often, the reason for this is lack of man-power to properly serve all blockchains available. Another reason can be ‘purity reasons’ where the community does not want to be on a blockchain that does not align with their ideals. For example, a large part of the success of Pancakeswap is because Uniswap did not want to launch on the Binance Chain. In these cases, forks can thrive.
Other forks that have proven to be successful over time use the forked code as a jumping off point. You might start out with Uniswap V2 code, but end up with an application that works differently and serves a particular purpose. The execution risk and smart-contract risk in these cases are greater since more of the code gets changed. However, even simple changes, like Curve did, have proven to be quite effective.
