Blockchain hard forks occur when a Blockchain network splits into two separate entities running on different protocols. Essentially, the original network maintains the previous functionality while the new fork deploys upgraded guidelines for its community with a new token value. Consequently, the baseline to determine the validity of blocks and transactions on either of the two networks becomes different.
But how do hard forks affect the price of the crypto assets on the networks that result? We explore the details and break down the implications based on the factors occasioning the hard fork and features affected on the network.
Factors that Lead to the Occurrence of Blockchain Hard Forks
Understanding the circumstances that inform the creation of hard forks sheds light on some of the implications on asset costs and market capitalization of the network. The following are common reasons for the phenomenon as observed on popular crypto networks:
Addition of new functionalities
Blockchain technology is rapidly improving, with innovations coming up as developers seek to create investor-friendly Blockchain ecosystems. Consequently, notable improvements push the developers to release new versions of a network to allow community members to enjoy such functionalities. However, hard forks occur when some member nodes refuse to migrate to the new upgrade, preferring to work with the original functionalities.
A good example is the Bitcoin (BTC) hard fork which resulted in two networks, BitCoin (BTC) and Bitcoin Cash (BCH). The operational difference is that BTC allows adding blocks of 1MB optimal size while BCH today holds blocks of up to 32mbs. Consequently, blocks validated on the BCH network will be rejected by the BTC protocols due to different rules.
Improvement of security features
Hard forks also occur when there is a need for improvement in security features that help safeguard investor assets on the Blockchain network. The security measures include the rules in smart contracts, blocks, transaction validation, and mining protocols. The data validation algorithm restructures the network’s security by changing how nodes approve authentic blocks.
For example, developers can create a hard fork of a proof of work (PoW) chain to move to a proof of stake (PoS) platform where security is better. The PoS system has validator incentivization to award the elected nodes who correctly add valid blocks to the chain. Additionally, there are coin-slashing protocols that punish malicious validators who undermine network interests by approving wrong blocks.
Resolution of community conflicts
Community conflicts on the Blockchain network are also a common cause for the emergence of hard forks initiated by the members. Here, members take sides when pursuing network issues of common interest, thus creating divisive opinions about how to solve the shortcomings in Blockchain code. Continued disagreement eventually creates a situation where each member node picks a fork to contribute their validation.
The BCH hard fork comes to mind in this scenario. Here, members created the BCH ASV (BCHA) and BCH SV (BSV) chains due to disagreements about Blockchain technology and block size supported by the mainnet BCH network.
Reversal of wrongful transactions
Forks can happen due to the need for developers to protect investors against fraud by introducing new regulations on smart contracts. Despite blockchains’ irreversible and unregulated nature, developers have previously worked on new upgrades that roll back Blockchain history to undo the aftermath of a malicious hack on the network.
For example, the Ethereum (ETH) hard fork in 2016 led to the creation of two separate networks with different native coins. Ethereum (ETH) assets are on the new fork, while the original chain uses Ethereum Classic (ETC) tokens. The ETC chain maintained original smart contract functionalities while there were changes in the smart contract protocols of ETH.
Correlation between Blockchain Hard Forks and Crypto Prices
The factors leading up to the creation of hard forks above stipulate scenarios that will affect the price of a crypto asset and the network’s market cap. Below is an in-depth analysis of the impacts:
Improved security features boost investor sentiment and, thus, price
Hard forks created by developers in pursuit of better security for investor tokens motivate positive sentiment in the market. Consequently, more people are willing to place their money on the platform, thus creating steep demand against a relatively stagnant token supply. The result of the scenario is coin scarcity which is a good thing for the network’s asset price. The cryptocurrencies will be more costly, with many traders assured asset safety on the Blockchain network.
Decreased community causes downturn in market cap and price
The diversity in community opinion about a network’s functionality leading to a hard fork creates two chains with fewer member nodes. Despite the existence of one chain with the majority of the original membership, the dissenting population represents a sizable chunk diverted to the alternative platform. The result is that the market capitalization of both forks diminishes considerably after each validator redirects their assets to a preferred chain.
Cheaper coin creation influences crypto prices
Changes in coin mining or additional protocols will influence the price of the blockchain’s native tokens in two ways: First, upgrading to a PoS protocol ensures validators can afford the cheaper equipment needed to participate, thus reducing mining costs. Consequently, the tokens are readily available, thus decreasing in cost. Secondly, cheaper mining costs increase the network membership since many can afford it, thus making the network more valuable.
Adherence to regulatory requirements stabilizes prices
Introducing new features that improve network adherence to government regulations makes the network more attractive to investors. Platforms with better protection for investor assets face little regulatory backlash and restrictions from government institutions.
They enjoy a good media and public outlook that boosts user confidence in the network. Their market cap and asset prices will be relatively stable compared to other crypto networks with volatile asset prices.
Remarks
The occurrence of hard forks represents a moment in a Blockchain network’s existence where splitting into two is the only option. The discussion herein highlights some causes of said splits while pointing out their impact on the market cap and asset prices of affected networks. Notably, the need for new investor-oriented features, better network security, and conflicts amongst validators come as main triggers.
The consequences are positive and unpleasant depending on the point of view concerning investor presence and security on either fork. Generally, security improvements increase network value and asset price, while crypto community conflicts reduce the market cap, negate user sentiment and increase security risks by reducing decentralization.