Definition
Chain split in cryptocurrency occurs when developers build an independent coin based on the code of an established blockchain, resulting in a separation or split from the original parent project.
The accessibility of open-source code in a wide range of cryptocurrencies empowers developers with the creative freedom to customize and create forks, facilitating the adaptation of the codebase to their distinct requirements and unique preferences in a professional manner.
Types of Chain Splits
Hard fork
Chain splits can result in two types of forks: hard forks and soft forks. A hard fork occurs when significant modifications are made to the original blockchain network, resulting in an immediate and definitive separation from the existing chain.
The new token will no longer be compatible with the blockchain it split from. Bitcoin Cash emerged as a result of conflicting viewpoints on the future scaling of the leading cryptocurrency, leading to a split from Bitcoin.
Soft fork
In contrast, a soft fork does not result in a chain split but rather enhances the existing blockchain by introducing new rules and features while maintaining “backward compatibility.”
An illustration of a soft fork is the creation of Litecoin from Bitcoin, aimed at addressing software or hardware limitations.
Reasons for Chain Splits
Crypto too slow
There are several reasons why chain splits may occur in crypto.
Certain developers may perceive the pace of technological advancement in the original cryptocurrency as insufficient to meet growing demands. As a result, they may propose technical enhancements to improve the adoption and functionality of the coin.
Litecoin serves as an example of such an initiative, where it was created from Bitcoin to address prevailing software or hardware limitations. This led to improvements such as a faster block generation time and the introduction of a distinct hashing algorithm, thereby expanding the coin’s supply.
Ideological differences
As blockchain evolves, developers on a single blockchain may have ideological differences as to the way the blockchain should develop or regarding applications of the blockchain. These differences in development approach can potentially result in a chain split, as each developer takes the coin in their preferred direction, leading to the emergence of separate blockchain paths.
This occurred with the split of Bitcoin Cash from BTC, due to conflicting ideas on how the leading cryptocurrency should continue to scale.
It also occurred with the split of Ethereum Classic from Ethereum due to differences in opinion over whether developers could amend the data on the blockchain to return stolen coins to their owners.
Key takeaway
- Chain splits can manifest through two distinct mechanisms: a hard fork and a soft fork.
- A hard fork results in a direct, immediate separation from the original chain, while a soft fork improves the existing blockchain while remaining backward compatible.
- Chain splits can arise from technical advancements and ideological variances, contributing to enhanced security and functionality.
- However, chain splits can also result in user confusion, disruption of investments, and decreased investor confidence due to centralization concerns.
FAQ
Can cryptos get lost due to chain splits?
During the Bitcoin Cash hard fork in 2018, a chain split occurred, causing certain users to lose access to their coins. The creation of a new blockchain with different rules meant that not all wallets and exchanges could accommodate the new token, leading to potential loss of cryptocurrencies.