What is a Chain Split and How Does it Affect Cryptocurrency?

By Boris Dzhingarov

Chain splits occur when the code of a cryptocurrency is separated and created new coins that exist independent of its original blockchain, as many cryptocurrencies are open source projects.

No matter why a split occurs, there can be numerous negative repercussions. These include confusion among users, disruption to existing investments and diminished investor confidence due to centralization.

Chain splits

Chain splits are a form of fork, in which the codebase from one cryptocurrency is copied to create an entirely new coin that stands independently from its parent project. This can occur due to ideological disagreements among developers or when new initiatives seek to enhance upon existing cryptos.

A sustained chain split can have numerous negative consequences, such as loss of user confidence, the risk of centralization and decreased development capacity. Furthermore, they have the potential to divide the blockchain community into distinct tribes.

Chain splits can result in investors losing their holdings of a particular cryptocurrency, as a newly created coin will share the same transaction history as its parent but no longer be compatible with it.

Hard forks

A hard fork occurs when changes to the rules of a blockchain protocol make it incompatible with previous versions. This requires anyone who wishes to stay on the network to upgrade their nodes and software in order to take advantage of the newly launched blockchain and coins.

Crypto forks can either benefit or harm the general community, depending on how they’re implemented. A hard fork may be utilized as a way to plug security holes or add new features.

However, some hard forks can be divisive events that cause division within the community and chaos on the crypto markets. For instance, the hard fork that created Bitcoin Cash (BCH) and Ethereum Classic (ETH) split consensus and caused much controversy within the cryptocurrency space.

When a fork creates two assets with market value, such as BCH and ETH, it’s usually expected that the asset with greater worth will rise in value and remain popular. On the contrary, when two incompatible chains create two unprofitable chains, price drops are usually experienced.

Soft forks

A soft fork is an upgrade to the software running a blockchain network without creating a new cryptocurrency. This upgrade is done through collaboration between users and developers, who adjust certain parameters within the blockchain.

These modifications are backward compatible, meaning nodes can keep running the old software and still participate in the upgraded blockchain. However, they must abide by the new rules which will reject any blocks not valid according to those changes.

Users (UASF) or miners (MASF) can activate soft forks. Unlike hard forks, which lead to a permanent split from the previous chain, soft forks are temporary and less disruptive to the cryptocurrency system as a whole.

In a soft fork, most nodes upgrade their software in order to enforce the new rules across the network. Eventually, the longer chain will absorb the shorter one; making soft forks less volatile options than hard ones. Nonetheless, investors should still be aware of both types and their effects on the crypto market.

The impact of a chain split

Chain splits can have devastating consequences for cryptocurrency, destabilizing the network and decreasing its growth potential.

Chain splits occur when a crypto developer modifies the code for an existing blockchain to create an entirely new version. This practice is commonplace since many cryptocurrencies are open-source projects, making their codebase accessible to developers and individual users alike.

Chain splits have the potential to have a profound effect on both communities and investors alike, not only diluting brand value but also distorting public perception of the coin and damaging investor confidence.

Chain splits create multiple competing versions of the original network that share its history up until a certain point. Miners then have the choice to switch over to one of these new chains based on their economic or ideological preferences, rather than staying with the original chain.

Chain splits are an inevitable occurrence, and communities should be equipped to handle them when they arise. However, there are ways to prevent them from damaging a community’s reputation or growth potential.