Cryptocurrencies: What Investors Need to Know about Hard Forks
If you’ve been trading cryptocurrencies, you’ve probably come across the term, “hard fork.”
Or, a term that’s used to describe a single blockchain that’s come to a “fork in the road.”
For example, we’ll see this happen when there’s a sizable change in network protocol that splits the blockchain into an old way to doing things and a new way of doing things.
Forks can be referred to as hard forks or soft forks.
A soft fork is less dramatic. It does not result in something entirely new.
However, a hard fork is the result of changes that are so intensive that every part of the blockchain must be upgraded in order to be compatible with a newer process.
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This is typically done to:
- Fix security risks found in older versions of a cryptocurrency
- Add new functionality, which can help improve future versions
Reverse transactions. If a cryptocurrency community finds a security breach, that community can reverse and eliminate all transactions from a specific date. In short, that community can make it look like transactions never even happened.
How to Create a Hard Fork
For a hard fork to become effective on a blockchain, there must be consensus.
This means that the majority of cryptocurrency holders must accept that a need exists for the initiation of any forking process. Ideally, the nodes, including miners and mining pools must agree that this process is allowed to take place.
What to do when a fork is underway
To be on the safe side, keep your coin in your wallet whenever your preferred token issuer intends to “fork” it. More importantly, you should move it from the exchange wallet.
Things may turn sour for you if your exchange doesn’t support the new plan.
So, when your coin is in your wallet or the wallet of an exchange that allows it, you get a particular number of the new coins after the fork.
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